The misery is piling up for Merkel

The victory of the French Socialists and humiliation of mainstream parties in Greece sent a shockwave throughout Europe - one that was particularly felt in Berlin.

Francois Hollande's election threw down the gauntlet to Angela Merkel, the German chancellor, who has railroaded the eurozone into agreeing a new "fiskalpakt" treaty enshrining Germany's austerity doctrine.

That doctrine - cutting the burden of state spending to free up the economy - has ruled supreme with the support of all of Europe's leaders, the European Union and financial markets. But last night (Sunday), political leaders were conceding the consensus had been shattered beyond repair.

With Europe's economies plunging further into recession and as unemployment in the eurozone breaks record levels, voters' demands for a new approach had finally become to great to ignore and could threaten the existence of the euro itself.

Greece is potentially ungovernable as a minority government must try to pass a new raft of austerity measures next month which are a condition of an EU-IMF bailout and Greek membership of the euro.

In France, Hollande is sitting on a powderkeg of resentment at measures that his government will have to pass if it is not provoke a meltdown of financial markets.

In a meeting in Berlin next week, Mrs Merkel is likely to warn Hollande that weakening austerity pledges would rattle markets and undermine investor confidence at a critical time for the eurozone's economy. She will remind him that support for the eurozone austerity pact is the condition for European Central Bank support for struggling financial institutions, many of which are French.

Dubbed the "Iron Chancellor" domestically, Mrs Merkel will not climb down for a Socialist president who is close to the German Social Democrats ahead of elections in Germany next year.

Her governing coalition suffered a fright of its own at the ballot box yesterday after appearing to lose its ruling majority in the state of Schleswig-Holstein.

Although Mrs Merkel's personal popularity remains strong, the Christian Democrats-Free Democrats coalition has struggled in a series of local elections over the past 12 months, with the junior party seeing its popularity collapse.

Pressure on Hollande to back away from radical policies and implement the austerity measures demanded by Mrs Merkel will come from the EU and financial markets.

Lord Glasman, a senior adviser to Ed Miliband, the Labour leader, said that avoiding a reaction from financial markets would make Hollande cautious and push him into the arms of Germany.

"There is very little chance that the financial markets will give Hollande the room to be radical. Mitterrand, elected in the heyday of Thatcher, was forced to abandon policies by the markets," he said.

"That was before the euro, which is locked to political conservatism."

French officials in the defeated Sarkozy administration have predicted economic chaos for France, which owes most of its debt to foreign investors.

"I am very worried for the French economy," said Gilles Carrez, budget rapporteur in the French parliament for Mr Sarkozy's UMP party. "We have made considerable efforts in the past three years to manage the crisis."

Mr Carrez said markets were keenly aware that Mr Sarkozy had brought the French state deficit down ahead of schedule to 5.2 per cent of GDP.

"The slightest let up will see us skid off course. Hollande proposes a return to a spiral of raising spending and civil servants," he said.

"As he has to make compromises with Communists and Greens, we are heading for the worst. The markets have not yet reacted, as we have scrupulously respected our deficit reduction commitments.

"But if they see the hatches even slightly opening - a U-turn on retirement reforms, say - the punishment will be immediate. The markets will judge the Socialists not by their promises but by their actions."