Whether you believed the media hype or the political reassurances and other forms of encouragement regarding the fallout for Australia from the European crisis, let the month of May be a warning: It really is that bad.

For quite some time I have taken a bullish stance re the current economic recovery. But nothing moves in a straight line, especially the markets.

Politics plays a major role in the performance and confidence of any economy. The Obama administration is clinging to the recent threads of positive employment in the US (which are a mixed-bag, at best), but the performance of the US economy over next few months, along with America’s ability to weather the European financial storm, will greatly influence the President’s re-election chances.

The same can be said for Europe. France recently ousted its President for the more hawkish Francoise Hollande, with hopes that he will promote developments that Nicolas Sarkozy couldn’t deliver. Italy is also in a state of political disrepair and at the centre of it all is Greece. Greek voters appear to have all but abandoned their current leaders amid fears the moves toward austerity may not prove to be the fiscal Band-Aid the debt laden nation needs. Swings to smaller, independent political parties at the forthcoming elections may be the tipping point that sends Greece into default. Right now, Greece continues to struggle despite a AU$170 billion bailout package as well as one trillion Euros in long-term loans.

The Australian government has hardly done a great job of instilling confidence either. A prosperous mining industry has been the saving grace for our two-speed economy, despite the Gillard government praising itself for averting financial melt-down and heading back toward surplus. The truth is there have been too many bungled decisions, political scandals, a flawed mining tax and a frail Carbon Tax solution, making this government as unpopular as its European counterparts.

Australian markets aren’t going to fall into oblivion. Australian banks won’t go under and mining companies will continue to produce and ship record amounts of iron ore. But there are unavoidable impacts of a European shakeout that will unsettle the fragile market recovery.

The ASX 200: Feeling the Pinch

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Euro/US Freefall

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It’s clear that markets are in for a difficult time and Australian stocks are not immune to further falls. Political uncertainty continues to plague global markets and Australia may be more susceptible to selling pressure than the US. Next week in Trading Tutors we explore the shakeout that had to happen and what’s next for an already wounded Greece.

Stay Ahead of The Game,

Lachlan McPherson