05/15/2012 02:45 pm ET Updated Jul 15, 2012

Whither Eurozone Austerity?

Ever since austerity measures began in the eurozone, experts assumed that Germany would be in the driver's seat -- and for four reasons. First, as the EU's powerhouse it was certain to have the most influence in shaping the terms under which the most debt-burdened countries would be helped. Second, German taxpayers would, in essence, be backstopping the rescue loans and would need assurances that the recipients would not take the money and carry on as usual. Third, none of the countries in serious difficulty had any leverage to resist demands for leaner budgets and all wanted to remain in the eurozone. Fourth, the powerful duo of German Chancellor Angela Merkel and French President Nicolas Sarkozy backed the belt-tightening-for-loans deal, as did the IMF.

But some of these circumstances are now changing because Europe's political winds have shifted over the past month. The first sign of this preceded the event now being hailed as the catalyst, Sarkozy's loss to Francois Hollande in France's presidential election -- and it occurred in an unlikely place: the Netherlands.

At the end of April, Dutch Prime Minister Mark Rutte's coalition government collapsed after two of its members, the Freedom Party of Geert Wilders (known chiefly for its Islamophobic and anti-immigrant platform) and Emile Roemer's Socialist Party, rejected cuts designed to bring the deficit down to the EU-mandated 3 percent of GDP from the 4.7 percent projected for next year.

The odd thing was that the Netherlands is scarcely suffering from a huge budget deficit, and its national debt is just under two-thirds of GDP, compared to 87 percent for the 17-member eurozone as a whole. Indeed, the country was seen as a relative success story and seemed to validate the widespread assessment that the EU contained two types of economies: well-managed northern ones, like those of the Netherlands, Austria, Luxembourg, and Germany, and laxly-run southern ones, exemplified by Greece, Spain, and Portugal.

What happened in the Netherlands may prove to be the start of a trend that alters the balance of bargaining power within the EU between the friends and foes of austerity. Sarkozy was voted out in no small measure because Hollande convinced French voters that they would face more cuts in spending if they reelected him. Simultaneously, the Greek elections produced another, though starker, show of no confidence against belt-tightening. The far left Syriza party, which flatly rejected the terms of Greece's bailout deal, took 17 percent of vote, while the two traditionally dominant parties, New Democracy and the Socialists, took a beating.

Syriza's leader Alexis Tsipras insisted that his party would not join any coalition government that upheld the austerity pact; and because of the electoral math Greece appears headed toward a new election. Greeks' anger at the hardships produced by the budget axe and the unwillingness of New Democracy and the Socialists to repudiate the austerity agreements could enable Syriza to emerge even stronger from the next electoral round.

There's more. On Sunday, people massed in Spain's major cities in renewed protests against austerity policies, which are widely blamed for the country's 21.3 percent unemployment rate, the eurozone's highest.

A less dramatic, but arguably ultimately more significant, change occurred Sunday in Germany. In North Rhine-Westphalia, Germany's politically most important state, Merkel's Christian Democrats lost to the opposition Social Democratic Party (SPD), which will form a government with the Green Party. This is a big blow to Merkel, who doubtless recalls that the SPD's 2005 defeat in the state soon ended Gerhard Schroeder's Chancellorship.

What now?

Germany's leaders could hang tough and continue to demand that Greece must either make the cuts it agreed to if it wants the next installment of loans, or choose to leave the eurozone.

But what if fresh elections in Greece increase Syriza's political clout and the Greeks, encouraged by what's happened in the Netherlands, France, and Germany, and by the mood in Spain, where Mariano Rajoy's conservative People's Party is facing mounting public anger over budget cuts that still fall far short of the EU's benchmark, decide to defy Merkel?

Germany could then retreat, realizing that current austerity plans are politically unsustainable, especially after Hollande's victory, and agree to a revision of the benchmarks, an increase in the time span for meeting deficit targets, and the initiation by the European Central Bank and the European Investment Bank of measures aimed at stimulating growth.

Alternatively, Germany could call Greece's bluff, forcing it out of the eurozone. If Greece then endures even greater economic pain, eurozone states needing bailouts could realize that they have no choice but to continue slashing expenditures. But with pesky Greece gone, Germany might make things somewhat easier for them by easing austerity terms so as to prevent the eurozone from losing more members.

Finally, Greece could decide to exit the euro and default on its debt. That would rattle the markets and make Greece a pariah for a spell, but the daredevil decision, which would involve readopting the drachma, might give it breathing space to recover by freeing it from debt payments and enabling it to boost exports by devaluing its new-old currency. In short, Greece would do a version of what the Argentine government did in 2001, when, facing a multi-year economic contraction and rising unrest, it defaulted on a $95 billion debt. Argentina recovered after a two-year slump and has posted an average annual growth rate of 7.8 percent since 2003.

But if Greece's gamble succeeds, what's to prevent other economically battered eurozone governments from following its example, especially if their economies don't improve and their voters get angrier?

The euro will doubtless survive, but, with Europe's political ground shifting, it's not farfetched to ask just how many of the states now using the currency will still be doing so in, say, five years.