As the French presidential election heads into first round voting April 22, a burning question is being grafted to the issue of “who will win?” French and European observers are now also asking “what will the outcome mean for the euro?”–especially amid new signs of market disquiet over debt troubles in Spain and Italy. Not surprisingly, investor doubt on the euro is a topic both conservative incumbent Nicolas Sarkozy and his front-running Socialist rival, François Hollande, are seeking to use to their electoral advantage, with both men claiming that the euro’s fate will be directly and immediately affected by the identity and ideology of France’s newly-elected president. Contrary to those assertions, however, economists predict that the markets will be more inclined to wait for the policies that the next French leader puts into place before making moves shaping the single currency’s future.
“At the end of the day investors will act on long- and medium-term outlook and policy impact on their own interests, not on political affinities,” says Marc Touati, chief economist of the Paris-based financial service company Assya, and author of the recent book When The Euro Zone Explodes. “There may be minor reaction to first and second round results, but investor decisions essential to the euro’s future will only come once it becomes clear how the next French president decides to handle the financial and economic crisis. Markets will be less concerned with who wins than what happens afterward.”
Anyone listening to campaigning in France would be forgiven for thinking the presidential race is in fact a zero sum struggle for the euro’s future. In an attempt to close the 7% to 10% lead Hollande enjoys in polls simulating their anticipated run-off May 6, Sarkozy has attacked the Socialist as reckless spendthrift bent on leading France into the same debt-laden “torment” Spain now faces. Sarkozy has also savaged Hollande’s pledge to renegotiate the recent European Union accord on deficit reduction so its debt-fighting austerity measures are balanced with new mechanisms to stimulate growth.
In response to Sarkozy’s accusations that Hollande’s leftist orthodoxy will bring France under immediate attack in bond markets, Hollande has used hyperbole of his own to bite back. He recently claimed a desperate “Sarkozy is trying to call markets to his rescue,” and denounced the president for encouraging investors to attack French debt to enhance his flagging re-election chances. “(Sarkozy) claims the perspective of our victory is terrifying markets,” Hollande told an April 15 campaign rally in eastern Paris as Sarkozy staged a rival meeting in the center of the capital. “For the moment, he’s the only one terrified.”
Perhaps, but Hollande does test market mettle at times. On Sunday, Hollande pledged he’d be “the president of a Republic that will be stronger than markets, more powerful than finance.” That echoed his Jan. 22 speech designating finance markets as “my real adversary.” He also refuses to placate investor debt concerns with classic austerity. Hollande’s program calls for the creation of nearly 200,000 state-assisted jobs, a re-lowering of retirement age to 60, and spending increases of $26 billion offset by new revenues of $38 billion—primarily via tax hikes on the wealthy and businesses.
So wouldn’t that, plus his promise to renegotiate the EU treaty to obtain growth stimulus requirements, make a potential Hollande victory horrifying to euro-skittish markets as Sarkozy claims? Not necessarily, says Gilles Moec, co-director European economic research at Deutsche Bank in London.
“Hollande’s economic program is rather clear, and both it and his chances of winning have been factored into the thinking of a lot of investors already,” Moec says—adding Hollande’s formerly quixotic insistence on EU growth stimulus has since been generally embraced across Europe. “What initially was an isolated growth position when Hollande made it earlier this year has now become the consensus in Europe–including within markets that view growth as at least important as debt reduction in overall economic outlook.”
Indeed, the view that all-austerity/no-growth is a recipe for recession has taken sufficient root in Europe that Sarkozy himself has been forced to reverse his earlier opposition to Hollande’s proposal by floating a variant of his own. What’s more, Moec says there are now signs that Sarkozy’s partner in the EU debt treaty, Germany Chancellor Angela Merkel, may also soon bend to growth demands emanating from opposition Social Democrats.
But if a projected Hollande victory isn’t spooking markets or leaders of other euro countries, both Touati and Moec warn that investors may still decide to turn on the Socialist if he’s elected as they have on other euro leaders on the left and right alike. “The problem is markets are demanding everything and its opposite from euro governments, which are supposed to find an impossible path between huge spending cuts and growth stimulus at once,” Moec says . “There’s never been a simple, direct link between a government’s political orientation and market support, which is positive for Hollande. But that won’t prevent markets from making schizophrenic demands on him if he does win.”
Touati thinks that reckoning–for either a Sarkozy or Hollande–will come in the autumn, when the newly-elected president will have to explain how he’ll stoke growth to markets, and also assure German partners he’s committed to reducing debt. “The Germans will only accept significant growth investment if France demonstrates how it will reduce spending in global terms,” Touati says. “Markets have shown in the U.S. that they won’t attack a country for its debt alone if it can maintain minimum growth levels. To markets, growth trumps all. The Germans want debt reduction first of all.”
Which is where rock may hit hard place for France’s next leader. If so, that impact will probably determine how difficult the next few years will be for both France and its euro partners.