On Sunday, the French rejected a second term for centre-rightist president Nicolas Sarkozy in favour of socialist Francois Hollande. While “decisively” may be too strong a word – Hollande claimed just a 51.62% majority – this victory has nonetheless made Sarkozy the first French leader in over three decades unable to gain a second five-year term of office. Hollande takes office officially on 15 May.

When he first came into office, Sarkozy originally seemed to promise a new wave of youthful vigour and a dollop of fresh energy from beyond the semi-closed world of the French political elite. Eventually, however, for many French voters, Sarkozy came to epitomise a small man whose narcissistic behaviour was simply out of place when France’s economic troubles and relentlessly high joblessness were topmost on their minds.

Even his pivot to the right to give a squeamish embrace of the anti-immigrant feelings of Marine Le Pen’s supporters was, in the end, insufficient for Sarkozy to carry the day against the anti-austerity fervour of Hollande’s supporters.

In broader terms, this French result seems to have discomfited a swathe of centre-right European governments even as it emboldened centre-left adversaries, giving them the sense that Hollande’s triumph is a taste of more to come. For the immediate future, however, one key outcome has been to drive a wedge between the heretofore solid axis between Berlin and Paris, now that Hollande is promising to rewrite the austerity-driven pact between the two nations – as well as a broader rethink on the EU’s 25-nation pact that was so painfully forged over the past several years.

Or, as Daily Telegraph deputy editor Benedict Brogran wrote in the aftermath: “Mr Hollande’s win, backed by the wholesale rejection of mainstream parties in Greece, the collapse of the Dutch government, protests in Spain and mayhem elsewhere, tilts the balance of the European debate sharply away from austerity. The right has taken a hit this week, the left is delighted. This will change the dynamic of European politics in far-reaching ways.”

In thinking about how Hollande crafted his triumph, a veteran political operative has explained there are two basic ways to campaign against an incumbent: a challenger can either offer an alternative set of policies, ideas or a new persona to attract voters to, or the challenger can try to turn the election into a referendum on the incumbent, framing him (or her) and their policies as failures that invite rejection.

Hollande and his supporters ultimately were successful in turning this election into just such a referendum, with some independent assistance from right-wing xenophobe Marine Le Pen, who hemmed Sarkozy in on the right and then refused to support him after she was eliminated in the first round.

It became a judgement on Sarkozy as a person and as the exemplar of austerity policies aligned with Germany’s Angela Merkel – the “Merkozy” duo that established the euro zone financial regime – and it is now over. Finis. To try to build some kind of rapport, despite the undiplomatic words so far, Merkel has already invited the new French president to come to Germany for some frank talk. This will be particularly important, because Merkel had effectively been in campaign mode on Sarkozy’s behalf during the French election campaign.

In his Sunday evening victory speech, Hollande told his nation that “Europe is watching us, austerity can no longer be the only option.” Hollande’s plan to broaden the European Union fiscal compact to incorporate pro-growth stimulus measures clearly connected with French voters. The larger narrative of this election is that Sarkozy is now the sixth and latest European leader to be brought low from popular anger over the way the continent’s leaders have been handling the euro zone’s debt crisis.

But, despite some local elections that also rejected the Merkel conservative coalition and policy line in one northern German province this past Sunday, Hollande will be getting a dignified earful from Merkel when they meet.

Merkel has been insisting the EU treaty is “not up for grabs” and, as a result, French electoral results and the words by Hollande and Merkel are making financial markets increasingly jittery about the potential disconnects and inchoate policy-making that might result. But for Merkel to give too much to Hollande right up front, could put her at risk with her German supporters (and voters), who already resent supporting all those presumably profligate southern European economies in the euro zone.

However, the votes that now may count most of all may be what columnist Tom Friedman once dubbed the electronic herd – all those bond traders, stock brokers, investment bankers and other global investors whose choices and electronic investment models can flip in a heartbeat – and whose decisions are carried out in milliseconds.

Meanwhile, in that other key euro zone election, Greek voters decisively gave up on the country’s main centre-right and centre-left parties, which had backed the austerity package imposed on Greece earlier. Instead they voted for a range of small parties – and especially a seriously rightwing party that came in second.

The Greek results are effectively a rejection of the tough terms the EU and IMF insisted on in exchange for a bailout package designed to keep the government’s lights on. The winners in Greece, effectively, have been those saying “enough of the austerity measures that come with the bailout. Enough, regardless of what happens next!”

But this outcome now puts Greece in an increasingly direct stance against the structures of the euro zone, the EU, its economic pact and all the financial institutions and investors who signed up for their financial haircuts in return for continued credit to the Greek government and economy.

Potentially, this could lead to a pullback from the previously agreed-to bailout tranches to Greece. That, of course, would force Germany and others to decide whether to continue support for Greece, regardless, or just cut it loose from the euro zone with all that would imply for Greece, the euro zone and global financial networks.

On Monday, Merkel had urged Greece to stay the course, saying: “Of course the most important thing is that the programmes we agreed with Greece are continued.” But there may not be any there, as far as Greek government decision-making capability is concerned right now. If, the centre-right New Democracy Party gained the largest percentage of the country’s splintered vote, by the evening of 7 May its leadership admitted it was unable to assemble a unity government. If this proves true ultimately, it’s going to be back to the voting booths for the Greeks yet again in a few months’ time, to see if they can make it all come out differently next time around.

In the aftermath of Sunday night, it has become abundantly clear that, for many Europeans, austerity is the newest dirty word. Instead of ever more stringent belt tightening by governments, the new debate will be how best to apply stimulus measures – will growth, potentially at least, come from stimulus spending to expand jobs, incomes and spending, or from other measures that presumably can produce more efficient industries that can, in turn, export more effectively, grow and thereby employ more workers down the road?

So far at least, the responses from financial markets have been mixed, but French borrowing costs have already started to creep up in comparison to German ones. Analysts are already arguing that any major policy changes from the fiscal compact that has imposed massive budget cuts will have a real impact on nations that use the euro and could bring in new turmoil and threats to the ailing euro zone economy.

In fact, eight of the euro zone’s nations are already in recession and unemployment in March throughout the bloc has reached a record 10.9%. If investors retreat from European investments amid the turmoil, the effects will inevitably spill over to the US and other nations.

Still, these austerity policies were put into effect as the world economy was already slowing. The result has driven Europe into an increasingly vicious austerity spiral. Spending cuts inevitably led to more government employees becoming redundant and trimming or ending various stimulus programmes. These measures were thus a further drag on national economies. This generated decreased tax revenues, and that required yet more cuts to meet the deficit targets that were also part of the broader agreements.

With his election, however, Hollande has already become the undisputed leader of a counterattack against the medicine of austerity measures. He is insisting the euro zone’s fiscal compact will have to include stimulus measures as part of a larger treatment for the euro zone’s ills. Or, as he said on Sunday evening: “At the moment the result was proclaimed, I am sure that in many European countries there was relief, hope.” But this will only be true if he can somehow bring Angela Merkel along with him.

Other voices are shifting, however. In response to Hollande’s statements, European Central Bank President Mario Draghi has called for a “growth compact”, despite that institution’s history of insisting on stringent fiscal discipline for nations.

So far at least, there are few tangible proposals for short-term growth stimulus packages on the table. Some suggest boosting funding to the European Investment Bank and the resulting new loans from there, and there are suggestions to use EU structural funds for infrastructure projects such as roads, but that only comprises about 1% of the EU’s total GDP.

Inevitably then, the task is going to be placed at the feet of Germany, which is Merkel’s fear. As a result, stand by for a battle over fiscal stimuli or for increased competitiveness measures, with all the dislocations and negative impacts on unemployment that may imply – political hot potatoes all. Germany has argued for over a decade that it has already made these painful cuts and reforms in the wake of East-West reunification, while all those other euro zone nations kept spending wildly beyond their means, so it can’t be asked to go there yet again.

Meanwhile, Hollande’s insistence that he will jump-start the French economy by investing in infrastructure and buoying small businesses, even as he keeps the overall deficit in check by raising taxes on the wealthy and closing corporate loopholes, has some investors muttering his plans will actually kill the very growth he hopes to foster.

For example, “Hollande’s platform of anti-austerity is not really anti-austerity; it’s really anti-growth,” says Jeffrey Sica, president of US-based Sica Wealth Management, managing more than $1-billion in assets. He adds “Whether it’s taxation or regulation or however they’re going to raise revenue… they’re going to shift the blame to business and to other higher-income levels.”

More spending would push up France’s borrowing costs and that, in turn, could drive the country back to the very austerity policies Hollande ran against in the first place. And remember, it was the inexorable rise in borrowing costs that forced Greece, Ireland and Portugal to seek bailouts that helped get the ball rolling downhill in the first place.

Despite the conventional wisdom, at least until Sunday night, that austerity was a distasteful but effective medicine for financial policies. But some pretty potent economists are already arguing that maybe Hollande – and all those very upset European voters – are more right than they are wrong. Austerity is not the cure, after all, they are saying.

Nobel-winning economist Paul Krugman, for example, has just written: “It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity – and that’s a good thing… What is true is that Mr. Hollande’s victory means the end of ‘Merkozy,’ the Franco-German axis that has enforced the austerity regime of the past two years. This would be a ‘dangerous’ development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.”

Krugman argues the imagined restore-business-confidence-via-austerity-measures-fairy doesn’t exist. “Spending cuts in a depressed economy just make the depression deeper,” he says. What’s worse, he argues there is very little gain for all the pain, economically. Borrowing costs in Ireland, the pious good soldier of austerity, are still higher than Spain, Italy and Germany’s, he notes.

Instead, Krugman suggests splitting up the euro may be the best of a bad lot of choices. He adds that “Europe wouldn’t be in this fix if Greece still had its drachma, Spain its peseta, Ireland its punt, and so on, because Greece and Spain would have what they now lack: a quick way to restore cost-competitiveness and boost exports, namely devaluation.” And he adds that Iceland – not in the euro zone – has actually been on the mend faster than other nations.

Krugman says there are other alternatives as well. Far less disruptive, expansionary policies that stimulate trade – the real foundation of Germany’s recovery over the past decade – are a real choice. He concludes that given the fact Merkozy’s pain and austerity no longer have a guaranteed lock on the euro zone nations, the euro – and European unity of policy – actually has a better chance of survival than was true just a few days earlier.

But, there will certainly be a whole lot more squabbling before all the mechanisms of economic power in Europe are facing the same way – regardless of whether it will be financial stimuli and expansionary policies or more unpleasant-tasting austerity medicine. For the next few months at least, we can make one economic prediction with total certainty: Rennies stomach tablets sales to economic policymakers, bond traders, bankers and international investors will do very, very well. DM

Read more:

• Austerity is a dirty word in Europe but what next? At the AP.
• Flashy, fiery Sarkozy fades from French scene at the AP.
• US stocks under pressure after European elections at the AP.
• Austerity Faces Sharper Debate After European Elections in The New York Times.
• Presidency, What Will François Hollande Do Next? in Time.
• Those Revolting Europeans (a Paul Krugman column) in The New York Times.
• Election Puts French Afghan Force on Notice in The New York Times.
• The Americans in Paris (a column by Rosecrans Baldwin) in The New York Times.
• Why’s austerity so unpopular in Europe? Because it’s not working, in the Washington Post.
• Hollande says French-German relationship must change in the Washington Post.
• We must move beyond growth versus austerity (a column by Jeffrey Sachs) in the Financial Times.
• Charlemagne’s notebook – The euro crisis – A winner in France, alarm in Greece in the Economist.

Photo: A unionist of the Greek Communist party takes part in a May Day rally outside the Hellenic Halyvourgia, a private-owned steel plant where steelworkers have been on strike for months over job losses, at Aspropyrgos suburb in the south of Athens May 1, 2012. REUTERS/Yorgos Karahalis.