News summary: Europe voters reject budget cutting

AP News
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Posted: May 07, 2012 4:52 PM
News summary: Europe voters reject budget cutting

WHAT HAPPENED?

In three separate elections, voters rejected the belt-tightening that governments imposed in response to Europe's debt crisis. Greek voters punished the political parties that accepted a bailout in return for making painful spending cuts. Election gains went instead to those who rejected the rescue terms. In France, Socialist Francois Hollande beat President Nicolas Sarkozy by embracing more spending to jolt the economy. "Austerity can no longer be inevitable!" Hollande shouted after Sarkozy conceded. And German voters in a northern state ousted the coalition led by Chancellor Angela Merkel's party, which has pushed austerity.

WHAT DOES IT MEAN?

Lots of uncertainty and the rising possibility that Greece could default on its debts and abandon the euro. The U.S. and European financial systems are so closely linked that a loss of investor confidence in Europe could cloud the U.S. economy. When markets fall, investors lose wealth and tend to get nervous about the economy. American exporters would suffer if sagging confidence in Europe shrinks the value of the euro against the dollar. A stronger dollar would hurt American exports by making them costlier in Europe. Exports have been one of the U.S. economy's few strengths since the Great Recession ended three years ago.

WHAT HAPPENS NEXT?

Greece will try to form a government. Another election might be required. Greeks will have to choose between honoring their commitments under the bailout or leaving the euro. In the worst-case scenario, the International Monetary Fund and rich European countries would rule out future bailouts. Greece might default and abandon the euro. Holders of bonds of other financially troubled countries might panic and trigger defaults and bailouts. In France, Hollande's differences with Sarkozy may not be as sharp as his rhetoric suggested. If Hollande does sharply boost spending, France might have to pay more to borrow. That could prompt a shift back to austerity. Still, Hollande could press other European leaders to pair budget-cutting programs with steps to increase growth, including spending on public works.