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Greece votes and markets tremble

As France and Greece hit the polls, shockwaves hit markets globally fearing further economic instability in Europe.

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Here we go again.

Expected it may have been, but the splintering political situation in Europe has raised fresh concerns about the viability of the single currency and the continent's resolve to extract itself from the economic mire.

Elections in France and Greece over the weekend delivered a protest vote against austerity that was far more severe than anticipated as voters abandoned the centre and fled to the fringes, with the resulting political turmoil once again creating the spectre of economic upheaval.

Francois Hollande, the left-wing frontrunner in the French presidential race.

Francois Hollande vows fiscal austerity won't be the only response to the region's crisis. Photo: AFP

Coupled with a poor employment showing in the US, which sent Wall Street sharply lower on Friday, the brief respite on global markets following the most recent Greek bail-out appears to have evaporated.

The Australian dollar this morning has dropped sharply, below $US1.02, as clouds once again have gathered over the global economic outlook while the stockmarket is bracing for heavy selling following heavy falls on Friday night.

With counting still underway in Greece, the ruling coalition which has dominated the country for decades is struggling as voters have swung sharply to the extreme left and right, both of which are staunchly opposed to the harsh austerity measures imposed as conditions for the Greek rescue.

In France, newly elected president Francois Hollande declared that austerity doesn't have to be Europe's only fate, throwing down the gauntlet to Germany's doctrine of fiscal restraint and its dominant position over the European Union.

Inevitable backlash

Given the extent of protests on the street in Athens during the torturous recent bail-out negotiations, a backlash was inevitable.

But the decimation of the ruling parties could see Greece reject the key conditions of the rescue package, thereby paving the way for a messy default and an exit from the European Union.

Should that occur, a domino effect could tumble across Europe's biggest economies and into the heart of the eurozone.

Italy and Spain are expected to come under renewed pressure on bond markets given their massive debt positions would be too large for a bail-out from the European Central Bank and the International Monetary Fund.

European economies already are on shaky ground. A double-dip recession is looming across the EU while Britain recently slipped back into technical recession. Unemployment is estimated at 20 per cent in Greece with similar levels in troubled nations such as Portugal and even higher in Spain.

The potential for social upheaval, which is being played through the political arena right now, has reinforced the arguments from some economists that harsh austerity - while a good long-term goal for the EU - would exacerbate the problem in the immediate future.

Europe's economic malaise has been caused by excessive debt which can only be solved by growth and while the profligacy of some member nations clearly needs to addressed, the sudden cuts in government spending have created a social and political crisis that has placed the economic reforms in jeopardy.