BERLIN Greek voters dealt a serious blow on Sunday to the fragile political consensus that has kept Europe's currency bloc intact through more than two years of crisis, rejecting the austerity-for-aid policies that have shielded the country from bankruptcy and a euro exit.
Greece's vote, combined with the victory of Socialist Francois Hollande over incumbent Nicolas Sarkozy in a French presidential election, will raise pressure on Europe's paymaster Germany to pursue a more growth-oriented approach to the crisis.
But it is far from clear whether Chancellor Angela Merkel, whose insistence on tough deficit reduction in vulnerable southern euro members is popular in Germany, will take more than symbolic steps in that direction, even after Sunday's elections.
"This shows that politics is getting out of control in Europe, the gap between politicians and voters is widening, that's what you see in Greece, that's what you see in France," said Steen Jakobsen, chief economist at Saxo Bank in Copenhagen.
"Clearly, voters across Europe have started to send the message: ‘we are not ready to do the reforms', and that's worrying."
More immediately, the struggle of Greece's two big pro-bailout parties - conservative New Democracy and socialist PASOK - to secure a parliamentary majority raises questions about whether Athens can stay in the euro zone in the long run, and may spark a new wave of contagion to other member states.
The Greek result puts Hollande, a novice on the international stage who has never held a ministerial post nor met Merkel, in the hot seat from day one.
Investors worried about Greece's future and the arrival of the first Socialist in the Elysee Palace in 17 years, could punish European financial markets starting on Monday, pushing the entire bloc back towards crisis-mode.
Hollande must cobble together a new government rapidly and prove that France, which alongside Germany has led Europe's response to the crisis, is capable of taking the quick decisions needed to keep the 13-year old currency zone together.
"His room for maneuver will be really tight," said Fabrice Couste, head of CMC Markets in Paris.
SPAIN IS KEY
Perhaps the most crucial question for Europe over the coming days is whether markets, spooked by the elections, renew their attacks on a big euro zone state like Spain, which has pressed ahead with deep budget cuts and economic reforms in a desperate bid to win back the confidence of investors.
Both Spain and Italy are considered "too big to fail" and would severely test Europe's resources if they required the kind of bailouts Europe has already given to Greece, Ireland and Portugal.
"In many ways Spain remains a bigger problem than Greece because of its size," said Charles Grant, director of the Centre for European Reform think-tank in London.
Worried about contagion, European leaders agreed earlier this year to bolster their "firewall" for protecting vulnerable states to 700 billion euros. Last month, the International Monetary Fund (IMF) coaxed an additional 430 billion euros in new crisis-fighting funds out of its members.
The European Central Bank, in a further step, has made massive amounts of liquidity available to vulnerable banks, a move which calmed markets in the first months of 2012 before concerns about Spain's dire economic state resurfaced.
Both Greece and Spain have endured austerity that has pushed their unemployment rates close to 25 percent and led to a severe contraction in economic activity. Pensions have been slashed, public sector workers fired and taxes hiked.
Hollande's campaign was predicated on a new approach to the crisis that would put growth first.
He is expected to travel to Berlin as soon as he is sworn in to begin negotiations on a new "growth pact" for Europe that would complement Merkel's "fiscal compact" - a set of rules to anchor German-style budget discipline across the euro zone.
New measures to bolster growth are expected to include steps to increase the firepower of the European Investment Bank (EIB), make more flexible use of EU structural aid funds and so-called "project bonds" to fund investment in infrastructure projects like highways, bridges and energy networks.
A Franco-German deal could be rubber-stamped at a summit of EU leaders in Brussels in late June. But few economists believe the pact will make much of a difference for countries on Europe's hard-hit southern periphery.
Nor do they think Hollande can afford to weaken France's own commitment to deficit reduction or jeopardize its relationship with Germany by pushing for bolder steps considered taboo in Berlin, like joint euro zone bonds, big stimulus programs or delays in meeting fiscal targets.
"Germany remains the political and economic hegemony in the euro zone. This is a point that Hollande will at some point have to come to terms with," Eurasia analysts wrote.
"What we are most likely to see is a flurry of announcements and initiatives, none of which will make a serious impact on short or medium-term growth prospects."
That would increase the odds of a backlash that could stir popular unrest that Europe's policymakers cannot control.
In Greece, the country where the crisis first erupted in 2009, voters punished the parties that have dominated politics for decades.
New Democracy and PASOK, the only parties that support the EU/IMF bailouts that have helped Greece avert bankruptcy, looked set to secure well under 40 percent of the vote together, and may struggle to form a parliamentary majority.
Extreme parties on the left and right scored unprecedented gains, in a pattern that has repeated itself in elections across Europe.
At the very least, Greece seems likely to face weeks of political uncertainty. Next month, parliament must approve over 11 billion euros in new spending cuts for 2013 and 2014 if the country to receive its latest aid tranche.
"Before the elections, we had pointed to a 40 percent risk that the flow of support to Greece may stop and Greece may thus be forced to exit the euro later this year," said Holger Schmieding, chief economist at Berenberg Bank. "The exit polls suggest that the risk has certainly not decreased."
European leaders signaled at a G20 summit in Nice last November that they would be prepared to allow Greece to leave the bloc if the Greek people refused to support the conditions of their bailout.
And German Finance Minister Wolfgang Schaeuble hinted at a possible euro exit on Friday, saying that Greece would have to "bear the consequences" if it did not elect a government ready to comply with the demands of its international lenders.
But an exit of any member would be a humiliating setback for the currency bloc and as there is no legal mechanism for a country to leave, the obstacles are high. A Greek exit would also set a dangerous precedent as markets could quickly bet on another country leaving.
That means a Greek departure is unlikely to happen soon, even if an angry electorate appeared to reject the policies that have kept the country on life-support and in the euro zone.
"I think it's very hard to see how Greece can stay in the euro in the long run. It's the only country where there are no signs that the medicine is working," said Grant of CER. "But even if Greece wanted to leave it would take a very long time."
(Editing by Anna Willard)