Results this weekend from electoral contests in Europe are likely to reshape the European Union’s approach to the crisis in which it finds itself. In France, 17 years of rightist domination ended; François Hollande will be the first Socialist occupant of the Elysee Palace since Francois Mitterand. And, Greece’s austerity-hit electorate handed out a confused and angry mandate. Greece’s mainstream parties, which had agreed on a sensible set of proposals, had their share of votes reduced by two-thirds; extremists of the left and the right have benefited on the back of ugly anti-German and anti-immigrant rhetoric. It looks more likely than ever that Greece will be forced to leave the single currency, even though an overwhelming majority of Greeks want to stay in it.
The biggest loser this weekend wasn’t actually up for re-election: Chancellor Angela Merkel of Germany, who has insisted on painful budget-balancing exercises across indebted European countries. In another election last week, Ms Merkel’s party received a lower vote share in the state of Schleswig-Holstein than in any poll since 1950. Its strength in the upper house of Germany’s parliament has been correspondingly reduced, strengthening the main Opposition, the Social Democrats — advocates for a more growth-oriented strategy for the euro zone. Italy, too, joined the rejection of austerity with a round of local elections that saw anti-Europe parties make big gains. Europe’s politicians will read this message clearly: single-minded austerity will not get you re-elected. March’s fiscal-discipline-first “compact” will clearly have to be re-examined, however unwilling Germany might be to do so. Pressure will certainly increase on the European Central Bank (ECB) to intervene directly to prop up sovereign debt. However, it is far from certain that the ECB, still focused on inflation, will give in. What is unquestionable is that Europe will finally have to move to focus on restoring growth. Even the technocratic Italian prime minister, Mario Monti, has said that reform of public finances is necessary but not sufficient for crisis management.
What shape will Europe’s growth-enhancing measures take, and what will be their effect on India, struggling with weak export demand? Mr Hollande prefers short-term stimulus spending on infrastructure — which may further shake up commodity prices, with a correspondingly doubtful overall effect on Indian balance sheets. More likely, however, is quantitative easing followed by a gradual and differentiated inflation across the euro zone. German wages – kept low by state-influenced collective bargaining – will increase, and the country’s competitiveness decrease. This rebalancing, if it occurs, will be good news for India: not just because global investors will have access to more liquidity, but because rebalancing will allow trade-deficit countries to compete for the demand it frees up.