Standard Chartered's senior economist Sarah Hewin takes CNBC-TV18 though a quick tour of significant developments across Europe. Hewin explains that Greece has begun to send positive signals thanks to rumours of mainstream parties in the process of forming a coalition.
She adds that voters in Germany will indicate their opinion about Merkel in the state elections on Sunday and hence is of significance even though the nation goes to polls next year. Hewin indicates that the cloud of uncertainty is yet to lift over Europe as the indices continue to fall across the region including the UK.
The economist concludes with indications that Merkel has turned sympathetic towards Hollande's views of including growth measures in the austerity compact between both countries.
Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: How do you think things will pan out with deep cuts across Europe and all eyes on Greece?
A: Certainly all eyes are on Greece for the moment. There are rumors that the coalition might be in the process of being formed. We have the two mainstream parties that support the bail-out, New Democracy and PASOK, trying to join with one of the smaller left-wing parties.
This will obviously be taken very positively by the markets. It would avert the new election which people have been talking about and it would essentially mean that there is a government in place which has a mandate to press ahead with the austerity and reform measures that the EU is asking for. So, in my view, Greece is still very much top of the headlines at the moment.
We got the German elections coming up on Sunday and it is also going to be important to follow what happens there because it will be the voters really indicating what they feel about Merkel.
Obviously she does not face the general election until next autumn. But this is a very significant state election coming up on Sunday. We will be looking for how much support there is for French parties as well because that has very much been the scene across Europe.
Q: Despite that the CAC, DAX and the FTSE are in the red?
A: Yes. There is a lot of uncertainty across Europe and it is not just on the political side, it is on the economic side as well. The backdrop is that next week we may well have confirmation that the euro area is in recession with its Q1 GDP comes in negative as we expect.
Similarly for the UK, the economic data there is not looking too promising. The consequences of a political crisis developing in Greece are very serious and could potentially mean that Greece is no longer able to stay in the euro.
If we have one country leaving then there is going to be certainly be a period during which people question whether the euro can survive even with the remaining countries.
So the politics in Greece is very significant and has much wider repercussions for the region as a whole.
Q: If PASOK and New Democracy are not able to form a coalition and that necessitates another election in Greece, do you think the mood will tilt towards a majority to the Syriza party which is against Greece's involvement in the Eurozone?
A: It's just very difficult to tell. I guess we will have some opinion poll results coming through ahead of any election and the date that people have been talking about if there is going to be another election, has been June 17.
So we would have a few weeks of opinion poll information before they had to stop ahead of an election. My guess is that markets would sort of gyrate according to what the opinion polls were saying.
Remember, that for much of Sunday night it looked likely that New Democracy and PASOK would be able to form a government. The initial results that came through suggested that they just about had enough seats to form a majority.
So it probably wouldn't take too much of a swing back to the centre for those parties to be able to form a majority coalition. But we just don't know and all I think we can do is wait and see what the opinion polls would say if we do get to that stage.
Q: Another cue for the next week perhaps is the meeting between Hollande and Merkel. Do you think that the results of the meeting have the potential to unsettle the markets? Or will he wait till the parliamentary elections in June?
A: I think Hollande has made his position clear. He is pressing for a growth compact alongside the fiscal compact treaty. The good thing is that Merkel has indicated that she is very sympathetic to that proposal.
His position is strengthening, but we do need to wait for the results of the parliamentary elections in June before we know how much support he will have from parliament.
But I think that developments between France-Germany is positive that they are going to be discussing and it's pretty much out in the open what Hollande wants. And as I said Merkel has shown some flexibility in moving towards his direction. So I guess our view is that we are not expecting that to be a big negative for the market.