By Rachel Rickard Straus and Richard Hartley-parkinson
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The FTSE 100 Index fell 100 points to 5,672 by lunch time today after investors became spooked by political uncertainty in France and the Netherlands and over a new recession in Spain.Â
The index tumbled following news that Nicolas Sarkozy had come second in Sunday's first round of presidential elections.
The mood wasn't helped by the Dutch government's failure to agree on budget cuts over the weekend, making elections there inevitable and casting doubt on its support for future austerity measures. The co-operation of economically strong eurozone nations such as the Netherlands is crucial if the currency bloc's rescue measures are to succeed.
Resignation expected: Dutch Prime Minister Mark Rutte has called an emergency cabinet meeting after budget talks collapsed
Additionally, the beleaguered Spanish economy went back into recession after it was announced that the economy had contracted by 0.3 per cent in the final quarter of 2011.
The Bank of Spain said the economy had shrunk a further 0.4 per cent at the start of this year.
The uncertainty in France and the Netherlands countries rocked the banking sector with Royal Bank of Scotland losing 4 per cent and Lloyds Banking Group falling 0.6p to 29.4p.
However, the sterling is holding steady at a 20-month high against a basket of currencies as investors looked to UK assets for safer alternatives as the eurozone ran into more difficulties.
The euro dipped 0.3 per cent against the pound to 81.69p, close to a 20-month low of 81.62p.
Against austerity measures: Dutch right-wing leader Geert Wilders refuses to support budget cuts required for the Netherlands to comply with an EU fiscal pact
The Netherlands, traditionally one of the strongest eurozone economies, was drawn into Europe’s debt crisis after an anti-EU party refused to back big deficit cuts required to conform to an EU fiscal pact.
The political crisis could lead to the collapse of the government and risks the country losing its prized triple-A rating, pushing up the rate at which the country can borrow money.Â
Dutch Prime Minister Mark Rutte, a key ally of Germany and other eurozone countries pushing forward financial discipline, has called an emergency cabinet meeting this morning after budget talks collapsed over the weekend.
He is expected to resign and announce snap elections, pushing another ‘core’ eurozone country into political and economic uncertainty.
The Netherlands was due to push through an EU fiscal pact, which binds eurozone countries to a three per cent deficit limit by next year.
However far-right leader Geert Wilders said he would not support the £13billion worth of cuts needed for Holland to meet the three per cent target.
The politician said he could not allow Dutch citizens to ‘pay out of their pockets for the senseless demands of Brussels’.
‘We don’t want to follow Brussels’ orders,’ he said. ‘We don’t want to make our retirees bleed for Brussels’ diktats.’
'Our competitiveness, credibility and triple-A status are at risk because Wilders has walked away. That is very costly. The interest rate on our state bonds can run up,' former Dutch minister and current European Commissioner Neelie Kroes was quoted as saying in Dutch daily De Telegraaf.
Reacting to news from the eurozone: The FTSE fell in early trading, a trend that continued until lunch time today
Economists said the political crisis not only threatens the Netherlands but has a wider impact on the eurozone. 'This represents a potential sizeable stumbling block to the already challenged fiscal compact,' Rabobank said in a research note.
'A failure on the part of a core country (and one we judge as 'true core' at that) to adhere to compact's deficit limits will represent a powerful debasement of the treaty,' it said, adding that it would be harder for Germany and other core members to sell the idea to voters that 'bailouts are not a free lunch - they come with a policy straitjacket.'
Yields on Dutch ten-year bonds rose to around 73 basis points this morning over their German equivalent, the eurozone benchmark, from 60 on Friday.
Governments of every EU state except Britain and the Czech Republic have signed up to the fiscal pact but each country needs to complete parliamentary ratification by the end of this year.
The eu rozone faced further turbulence as results from the first round of the French presidential election showed Socialist candidate Francois Hollande marginally ahead of incumbent Nicolas Sarkozy.
Some analysts said a defeat for Sarkozy in the May 6 second round could weaken cooperation between France and Germany in dealing with the debt crisis.
Mr Hollande has pledged to renegotiate the European fiscal pact that binds countries to a three per cent deficit limit by next year.
Further bad news came from Spain, which revealed it is back in recession as the economy contracted 0.4 per cent in the first quarter of the year.
The drop follows a 0.3 per cent decline in the fourth quarter, the central bank said. Two consecutive contractions amounts to recession.
The economy is expected to shrink further and unemployment to continue to rise as the government implements drastic deficit-reduction measures.
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This FTSE fall is overdone.Sarky was forecast to lose by a landslide so this will have been in line with market expectations. Yet another attempt by market traders to panic the gullible into selling their shares on the cheap.
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NOT TO WORRY HOLLAND CAM MORAN WILL TAX US HIGHER SO WE CAN KEEP GIVING TO EUROPE .
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let the euro go down the pan we don't need it to the people who say we do think about how much it is going to cost you to prop it up country after country will default it has had its day bye bye
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