Elections in France and Greece effecting the US MarketsSunday's elections in France and Greece have defiantly and decisively moved the backlash against austerity from the streets of Europe to the halls of political power.

With the winning parties in both countries having staked their campaigns on pushing back against the harsh deficit- and debt-slashing regimes being imposed by the European Union, the future of the eurozone is again in doubt.

And as goes Europe, so goes the U.S. Here's a look at why the bond markets in particular care so much about this past weekend's goings on -- and why you should, too.

When Bond Markets Attack

The eurozone has been in various stages of economic turmoil since late 2009, when -- in the time of another political transition -- the world found out that Greece's deficit was significantly higher than previously thought. By EU rules, the maximum deficit any member country is allowed to run is 3%; Greece's was closer to 14%.

This revelation drove the cost of its sovereign debt, determined by the bond markets, higher and higher, pushing it to the brink of bankruptcy and starting a chain reaction throughout the eurozone that began forcing debt costs for countries such as Portugal, Italy, Spain, and even France higher as well.

Just like with people or companies, debt payments can get so high even a country can default. To keep Greece from defaulting, the EU organized one bailout and then another -- this second one contingent on the country following strict deficit- and debt-reduction guidelines.

Other EU members, not yet on the verge of default like Greece, have also been forced to adopt draconian economic measures in order to reduce their deficits -- and not just for fear of Brussels, but for fear of the bond markets, as well.

Playing Against Team Merkel

Just when everyone thinks that Europe has reached some sort of economic stability, there's an unwelcome surprise, like these elections.

Under the center-right leadership of Nicolas Sarkozy, France has worked side by side with Angela Merkel of Germany for four years now to try to stabilize the eurozone. France and Germany are the EU's two biggest members and, as such, together have wielded the necessary political and financial firepower to corral smaller EU members such as Greece, Ireland, and Portugal when they step out of economic line.

Austerity has been driven hardest by the Germans, to whom it comes quite naturally. But how will France's new president-elect behave?



Will Hollande join Team Merkel and continue to push hard for austerity when, frankly, it's something that doesn't come naturally to most socialists -- especially one who had run precisely against Sarkozy's record in order to get elected?

And then there's Greece. There, voters failed to give any single party a clear majority in parliament. And since no party has yet been able to form a new coalition, Greek voters will likely be returning to the polls next month to try again. But the party that came closest to winning, and therefore the party with the best chance of forming a coalition government after the next election -- the far-left Syriza party -- has taken to calling the EU rescue package invalid.


Here's Where the Trouble Crosses the Water

If it ends up that the new Greek government refuses austerity, its next round of bailout money will almost certainly be withheld. If this happens, Greece will have no choice but to default. It may then be forced out of the euro, which there's already talk of.

If France, under Hollande, chooses not to join Germany in its drive for austerity, Germany can expect a harder time forcing errant countries to come around to its way of thinking. But the bond markets like austerity, and if they don't see countries like Spain, Italy, and France shaping up their finances, they'll keep driving bond prices higher on those countries until they too face default.

There's only so much money in the world for bailouts.

Europe can likely absorb a Greek default, but not the series of sovereign defaults that might follow. The EU is sick. Spain and the U.K. have officially slipped back into recession. It won't take much to make Europe get much worse very quickly, and that would almost certainly spread to the U.S.

In a nutshell, further and deeper recession in Europe could send the teetering American economy back into recession itself.

The U.S. is currently experiencing some growth, and unemployment is edging down. We want to keep everything headed in that general direction. Everyone is getting tired of Europe's little parade of surprises, undoubtedly including Europe. So cross your fingers, and hope for pragmatism on the part of Hollande and a return to sensibility among Greek voters -- for everyone's sake.

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Morris Cantonitis

People who need people R the luckiest people in the werld……
Well sung and correct Barbara.
But what happens where there R only financial NYC PIGGS and then
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2 that ol Mickey Mouse Song and let’s have sum fun

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flattered by your applause

May 11 2012 at 9:25 AM Report abuse rate up rate down Reply
derealest

I can't believe that we collectively wasted the last three and a half years on the socialist agenda of Obama. Please let's call it what it is. He is following the Alinski model to a tee. The goal is to tear down America from the inside and then implant a socialist regime. Come on, how do you explain the steps he has taken so far? Instead of dealing with the economy first, he slammed the Obamacare plan down our throughts. Now you have the IRS in your back pocket with "real time" access to your bank account. Look it up, This is not freedom, It is not what I want for the next generation to clean up. Soon there will be no turning back as you give half of the people what they want without any contribution, they will never vote out the free ride. We have been sold out. Time is running slim.

May 11 2012 at 8:33 AM Report abuse rate up rate down Reply
jattila

The progressives started with the USSR and now are making their way thru Europe and the USA destroying the economies like locusts

May 11 2012 at 12:15 AM Report abuse -2 rate up rate down Reply
danno

Gee wonder if there new goverment perodical will be called "FORWARD" AS MOST COMMUNIST RAGS ARE NAMED THAT..

May 10 2012 at 11:45 PM Report abuse -1 rate up rate down Reply
thefacts22

I have the feeling that Hollande will do the right thing and control governmnt spending as well as privatize several services that now are working with deficits.Spain was destroyed by 8 years of socialism and the corruption that always goes with those characters.Now Spain is under a firm and pragmatic government,that i am sure will do anything to restore healthy economic health and cut waste and fraud,exactly what we need in USA

May 10 2012 at 7:45 PM Report abuse rate up rate down Reply
dinohealth

Germany has been profiteering from the situation, not bailing anyone out! When Germany (through the European Central bank) borrows at 1%, and turns around and lends to the Greeks at over 4%, while imposing harsh economic austerity measures as part of the deal that virtually guarantee deeper recession and shrinking revenue (ability to repay), that, is not "bailing" anyone out! If Germany wanted to help, they might have ambled up to the table and paid the reparations that are owed to Greece from WWII, when Germany destroyed Greece's infrastructure. Instead, as part of German "help", the loan package includes the mineral, water, and energy rights under the ground of Greek citizens' homes that hold a mortgage! German companies own most of Greece's telecommunications infrastructure, are buying up water companies, and are aggressively moving in buying Greek solar energy. Geopolitically, Greece's major future wealth does not rest on oil, minerals, and gas (though there are huge deposits of same under its territorial ground and waters); its greatest future wealth is found in its huge deposits of fresh water and solar energy (300+ days of sunshine a year)!

May 10 2012 at 5:43 PM Report abuse rate up rate down Reply
telnetcon

and to think that our annointed leader wants us to follow the European model!! Whhhooooo...I have had all the "hope and change" I can afford.

May 10 2012 at 4:57 PM Report abuse +5 rate up rate down Reply
1 reply to telnetcon's comment
thefacts22

Our annointed leader is an incompetent fool,and will do what socialist do all over the world,spend USA to bankrupcy,but be sure that crony accomplices will become millonares

May 10 2012 at 7:50 PM Report abuse rate up rate down Reply
dinohealth

Great article. Investing in Europe these days is only for hopelessly addicted gamblers. Unfortunately, the Greek, French and European voters are not likely to "return to sensibility" for the sake of the bond market! "Pragmatism" to Greek voters means dealing with 25% general unemployment, 50% unemployment for youth up to 25 years of age, $500-dollar retiree pensions reduced by 20% to $400, the closing of 1 out of 3 small shops and businesses, despairing households struggling to pay rent, put food on the table and pay heating bills, loss of homes, a dramatically rising suicide rate of despondent citizens, and the prospect of more stringent and austere measures to come with the promise that the bankers will be paid first, before a single euro goes to stop and reverse the situation. The camel's back is already broken. Hard to speak of bond markets to these folks under the circumstances described, above. Unfortunately, whatever happens in the future (Greece needs General Marshall and Aid, not, more debt that it will be unable to repay without driving its people out of the country), even if a coalition government is formed, will undoubtedly deepen European recession, and will most likely drive Europe to a major depression if the current harsh, hasty, globalization "cookie cutter" economic policies are not change (I hope the IMF, Central European Bank, and the EU Commission –Troika - are listening). To give you an idea of how off-the-mark Troika austerity measures in Greece are, they failed to consider that in Greece, the salaried workforce is only 50% of the total workforce, with the rest of the workforce engaged in mom-and-pop small shops. Well, the formula of across-the-board salary reductions, and “urgent” special income and property taxes only had half of the expected impact. A series of “urgent” real estate taxes imposed on the citizenry through their electric bills (with cutoff of their electricity as leverage), 15% hikes in electricity, 20% hikes on heating fuel, 40% hikes on gasoline, to name a few, resulted in the doubling of unemployment in just one year. With a shrinking workforce, a shrinking income, the closing of 1/3 of the small businesses, and, the resulting shrinking economy, it is no wonder that the revenue side of this cookie-cutter is falling short of Troika’s expectations! This formula if followed by the IMF throughout Europe. Expect Ireland and Spain voters to follow the Greek and French voters’ lead. As for investing in Europe under these conditions, Russian Roulette anyone

May 10 2012 at 4:44 PM Report abuse +2 rate up rate down Reply
Iselin007

Some will say why you here if you went to school.

May 10 2012 at 3:59 PM Report abuse -1 rate up rate down Reply
1 reply to Iselin007's comment
thefacts22

People like you is hopeless,envy consumes your sad life

May 10 2012 at 7:53 PM Report abuse rate up rate down Reply
Iselin007

I met some of the most racist trash working at Walmart you haven't seen the worst of all possible things.

May 10 2012 at 3:54 PM Report abuse rate up rate down Reply