Euro jitters as voters go to the polls

National and local elections across the Continent will test public willingness to accept austerity

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The Independent Online

The eurozone is facing a "perfect political storm" as millions of Europeans are given an opportunity to vote on the austerity policies that have helped plunge the single currency back into recession.

Next Sunday sees simultaneous national elections in Greece and France as well as local elections in Italy and Germany. Analysts warn that the outcome of these polls could further frighten already fragile financial markets, especially if new governments reject existing crisis-fighting agreements or find themselves too weak to deliver on them.

RBC Capital Markets described the elections as "a perfect political storm" and its European economist, Gustavo Bagattini, cautioned that "political risk will remain a major factor over the short term".

The Greek election will end the administration of Prime Minister, Lucas Papademos. While the two largest parties have pledged to push on with austerity policies, analysts warn they might not win sufficient support in parliament to form a stable coalition. "With the incoming government set to be told to find further budget savings of 5.5 per cent of GDP, this could prove problematic," said Victoria Cadman of Investec.

France is another potential source of investor alarm. Yields on 10-year French bonds spiked above 3.14 per cent on Monday, after the socialist candidate, François Hollande, won the first round of the presidential elections, having campaigned on a pledge to renegotiate the EU fiscal compact. Though Mr Hollande has sought to tone down that message ahead of the election's second round this Sunday, Simon Derrick of BNY Mellon said that markets could still get caught out if the next president is more radical than expected. "You can't discount a surprise of some kind," he argued.

Analysts said that the Italian local polls – the first since Mario Monti was installed as caretaker Prime Minister in November – could also be important. "Another strong showing for the Democratic Party, or another thumping for People of Freedom, could lead either party to rethink its strategy," said Mr Bagattini. "If the spectre of early elections were to be revived, this could reignite worries about the political situation in Italy."

The election in the German state of Schleswig Holstein will be closely watched for indicators as to whether Chancellor Angela Merkel's Christian Democrats are likely to be re-elected in next year's national elections.

Another potential democratic spanner in the eurozone works is the Irish fiscal compact referendum on 31 May. Polls suggest the public could vote No.