Global markets tumbled yesterday as the euro zone lurched into fresh turmoil after voters in France and Greece delivered a blow to austerity measures.
Europe's single currency hit its lowest level in four months, falling more than 1 per cent in early trading to below US$1.30 as investors flocked to the US dollar.
Banking shares came under heavy pressure, with the French lender Crédit Agricole slumping to an all-time low, BNP Paribas dropping 4.1 per cent and Société Générale falling 4.5 per cent. In Greece, Alpha Bank shed as much as 21.6 per cent and National Bank of Greece fell 16.6 per cent.
Investors were reacting to the outcome of French and Greek elections on Sunday. In France, the newly elected president, François Hollande, has vowed to shift the burden of austerity measures to the rich and raise taxes on bank profits by 15 per cent. In parliamentary elections in Greece, the majority voted against parties that backed the hardship policies associated with the bailout from Europe.
"The results set the scene for further uncertainty over the fate of the euro zone's fiscal compact as well as the whole approach for dealing with the regions' debt problems," wrote Tim Fox, the chief economist of Emirates NBD, in a research note.
Public support for austerity measures designed to cut debt has been fading because of slowing growth and rising unemployment.
"It's a trade-off between fiscal rebalancing and economic growth that governments everywhere are struggling with," said William Downe, the president and chief executive of BMO Financial Group, a Canadian lender.
French expatriates in Abu Dhabi did not back Mr Hollande, however. Of 1,741 French expatriates voting in the capital, 1,086 chose Mr Sarkozy and only 655 went with the Socialist Mr Hollande, data from the French Embassy shows.
About 2,500 French business people are thought to live in Abu Dhabi.
"It's possible that more people will want to leave France and come here as they are nervous [about the result] but it's too early to say," said Sophie Nayrolles, the head of recruitment at the French Business Group Abu Dhabi.
The need to reduce France's budget deficit or face further downgrades is likely to lead Mr Hollande to take a more pragmatic approach than suggested in his electoral rhetoric, said Philippe Dauba-Pantanacce, a French national and senior economist for Turkey, Middle East and North Africa at Standard Chartered in Dubai.
"The biggest worry for the euro zone is certainly not the French election results but the uncertainties facing the Greek political landscape and by extension, the future of the various programmes put in place to ensure the place of Greece within the euro zone," he said.
Greece's election result has created uncertainties about the country's commitment to reforms required under its second bailout programme. The two parties with the most votes have spoken out against further austerity measures.
"Full and timely implementation of the programme is of the essence in order to meet the targets and [reach] sustainability of the Greek debt," the European Commission's economic and monetary affairs spokesman, Amadeu Altafaj, was quoted as saying at a briefing yesterday. As the crisis in Greece has worsened, many Greeks have abandoned their indebted homeland try to build livelihoods in the UAE. More than 1,000 young Greeks have left for the UAE during the past year.
"I fear another five years of political wrangling over the policy direction in Greece," said John Podaras, a Greek hospitality consultant who lives in Dubai. "We have started on the path of cutting the budget deficit and we need to continue the course."
* additional reporting by Gregor Stuart Hunter