Germany’s Dax and France’s Cac-40 were more than 1% lower and the main stock exchange in Athens slumped 8% as markets worried that Greece’s failure to form a government has placed further doubt over the country’s rescue, increasing speculation over the eventual break-up of the single currency.
The election of socialist Francois Hollande as France’s new president was widely expected but will add to growing expectations of a backlash against Europe’s current austerity drive led by German chancellor Angela Merkel.
London markets were shut today but could resume on the back foot after slumping 2% on Friday on fears the US recovery is running out of steam.
Analysts fear the result of the Greek elections, with no party winning enough votes to form a government, has left the country in political limbo, preventing much-needed reforms.
Anita Paluch, a trader at Gekko Global Markets, said: “Having rejected the austerity, the country finds itself in a spot from where it may be difficult to meet its obligations and this is what is spooking the markets at the moment – the possibility of a disorderly default of a member state.”
Ms Merkel also suffered a setback on Sunday in a regional election in the northern state of Schleswig-Holstein.
Manuel Maleki, an analyst at ING Bank, said a new equilibrium will have to be found in Europe. He added: “While the markets could initially worry about tensions between Germany and France, the possibility of a revision of the current recession-austerity mix in Europe is not necessarily a bad thing for the longer term stabilising the eurozone.”
As well as the fresh European uncertainty, markets are worried over the state of the world’s largest economy after figures on Friday showed US jobs growth slumped in April for a second month in a row.
The developments also add to pressure on the Bank of England as it meets to decide whether to offer more emergency support for the UK economy this week. Experts are divided over whether the Bank’s Monetary Policy Committee will increase its £325 billion quantitative easing stock, after injecting £50 billion in February. Interest rates will be kept at a record low of 0.5%.