WASHINGTON (AP) — Financial markets will likely stumble this week after elections in Greece and France cast a pall of uncertainty over Europe's efforts to solve its debt crisis.
On Sunday night, the euro plunged to $1.2988, a nearly five-month low.
Greek voters on Sunday voted mostly for two parties that want to change the nation's international bailout terms or even overturn its rescue deal, according to early projections of the election results. Greece won't have a government until parties with divergent worldviews can form a governing coalition.
Greek voters are reacting against spending cuts imposed on the recession-weary nation by the international lenders whose bailouts are keeping it afloat.
Also Sunday, French President Nicolas Sarkozy lost in a runoff election to Socialist candidate Francois Hollande. Hollande has criticized France's austerity program and wants to encourage growth by boosting government spending.
Sunday's votes raise serious doubts about whether voters will swallow the current plan of international bailouts coupled with severe cost-cutting, economists said.
Many believe the austerity program is necessary to keep bond investors from panicking about the possibility that more European nations will default or require bailouts. But a growing number, like Hollande, say the cuts have been too much, too fast. They say the region's economy can't return to growth unless governments stop tightening the fiscal noose and start spending again to create demand.
Uncertainty about the path forward in Europe may mean a return to extreme market volatility after several months of relative calm.
Here's a look at what Sunday's elections might mean for global investors.
— How much does it matter?
A great deal. The financial mess in Greece has rocked financial markets for years. To stay afloat, Greece's government depends on loans from international creditors, and it must meet strict targets on cuts if it wants to keep receiving money. But Greek voters elevated two parties that rejected terms of the bailout. If Greek leaders refuse to stick to terms of the bailout deal, the International Monetary Fund may pull the plug on supplying funds.
"Given the degree of uncertainty that is going to enter Greek policymaking after these elections, I suspect the prospects of Greece being able to undertake serious reforms has been reduced even further," said Cornell University professor Eswar Prasad.
— Best-case outcome: Greek parties build a governing majority that negotiates successfully with international lenders. Greece's lenders will dial back some demands for austerity to quell political unrest and allow the Greek economy to recover. Greece will continue to use the euro.
— Worst-case outcome: Greece's new leaders are unable to find common ground with international lenders. The IMF pulls the plug on future bailouts and richer European nations refuse to step in. Greece defaults and leaves the euro currency or is expelled. There is panic among holders of bonds issued by other financially troubled countries, creating a cascade of defaults and requiring more bailouts.
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