Hollande Vows to Fight Austerity After Beating Sarkozy

May 7 (Bloomberg) -- Bloomberg's David Tweed reports that Francois Hollande, who defeated French President Nicolas Sarkozy to become the first Socialist in 17 years to control Europe’s second-biggest economy, pledged to push for less austerity and more growth in the region. He speaks on Bloomberg Television's "In The Loop." (Source: Bloomberg)

Francois Hollande, who defeated French President Nicolas Sarkozy to become the first Socialist in 17 years to control Europe’s second-biggest economy, pledged to push for less austerity and more growth in the region.

“Europe is watching us,” he told supporters in Tulle, France, last night after he won about 52 percent of the vote. “Austerity isn’t inevitable. My mission now is to give European construction a growth dimension.”

Hollande inherits an economy that is barely growing, with jobless claims at their highest in 12 years and a rising debt load that makes France vulnerable to the financial crisis that has rocked the euro region the past two years. Sarkozy became the ninth euro leader to fall in that time and the first French president in more than 30 years to fail to win re-election.

Hollande’s comments were echoed in Greece, where voters flocked to anti-bailout groups, leaving the two main parties, New Democracy and Pasok, a seat short of a majority if they govern together, an Interior Ministry projection showed. His victory may sharpen tensions with key allies with Hollande advocating a more aggressive European Central Bank role in spurring growth -- a measure opposed by Germany.

The Stoxx Europe 600 Index (SXXP) lost 0.5 percent and the Standard & Poor’s 500 Index futures fell 0.9 percent at 9:01 in Paris. The euro weakened to a three-month low, falling to $1.2982 at 7:20 a.m. in Paris.

Parliamentary Election

The campaigning in France isn’t over. The country elects its lower house of parliament in five weeks, prompting calls from all political leaders to keep fighting. If Sarkozy’s Union for a Popular Movement keeps its majority, Hollande would have to work with a Cabinet controlled by the opposition, constraining his ability to deliver on his pledges.

The most likely outcome is a Socialist win that puts Hollande in a more “left-leaning stance,” according to Alastair Newton, political analyst at Nomura International in London. Hollande takes office next week before heading to summits of the Group of Eight and NATO in the U.S.

While Socialists stand ready to dominate policy making for the first time since 1993 -- holding both the presidency and the Cabinet -- bond yields were steady today. Ten-year French debt yields 124 basis points more than comparable German securities. That’s down from 145 basis points after he won the first round on April 22 and lower than the 133 basis points at the start of the year.

Credit Rating

Still, “we like being short” -- betting against -- French bonds, said Harvinder Sian, a senior interest-rate strategist at Royal Bank of Scotland Group Plc in London.

“Medium term, we think the absence of real reform and a lukewarm commitment to balanced budgets augurs ratings cuts for France and wider spreads,” he said.

Standard & Poor’s, which in January stripped France of its AAA credit rating, said today that Hollande’s election will have “no immediate impact” on France’s sovereign rating.

Hollande faces the task of increasing competitiveness, cutting the budget deficit and spurring growth while keeping the region’s financial woes at bay. Campaigning against the most unpopular president in postwar France, he avoided specifics.

“We expect resistance to change and proposals to preserve France’s social model to prevail once Parliament reconvenes after June 26,” Natacha Valla, a Paris-based economist at Goldman Sachs Group Inc., wrote on May 4.

‘Normal’ Guy

Hollande supporters gathered yesterday to celebrate with music, tears of joy and impossibly clotted crowds. After speaking in the district he represents, the president-elect flew to Paris and addressed thousands in the early hours today at Bastille square.

Conceding defeat yesterday, Sarkozy said, “after 35 years of politics, after 10 years at the highest levels of government, after five years as head of state, I will become a Frenchman among the French.”

Hollande sought to portray himself as the anti-Sarkozy leader, calling himself “normal” to contrast with the incumbent known in the media as “President bling-bling.”

Hollande is the second Socialist president of the Fifth Republic, established in 1958. Francois Mitterrand was first.

His path to power followed a traditional French route. He graduated from the Institute for Political Sciences in Paris and the National School of Administration, schools that trained all post-war presidents, except Sarkozy and Charles de Gaulle.

‘Fall Into Line’

He was educated at HEC-Paris, a business school where he befriended some who were to become corporate leaders, such as Axa SA (CS) Chief Executive Officer Henri de Castries. His social circle includes Jean-Bernard Levy, CEO of Vivendi SA, and Jean- Louis Beffa, former CEO of Cie. de Saint-Gobain.

In the early 1980s, Hollande went to work for Mitterrand, helping him nationalize companies. A decade later, he helped Prime Minister Lionel Jospin sell them to help the Socialist government cut its debts to join the euro.

“The pressure to clarify the position after a change in government will be high and it will be immediate,” said Steven Major, head of fixed-income research at HSBC Holdings Plc in London. Investors are “looking through the election and reasoning that the government will fall into line.”

Hollande has proposed higher taxes for big companies and cuts for small and medium-sized businesses; a 75 percent levy on incomes above 1 million euros a year and special taxes on banks and oil companies.

More Spending

His platform would raise spending by 20 billion euros ($26.3 billion) over his five-year term and the retirement age for those who started working at 18 years old pushed back to 60 from 62. He said he would discuss with France’s banks the split of their retail and investment activities.

Tax increases and eliminating loopholes would seek to raise 29 billion euros. The budget plan aims to eliminate the deficit in 2017, one year later than under Sarkozy’s plan, with a 3 percent of gross domestic product deficit target for 2013.

Minutes after Hollande’s victory was announced, political leaders were already fighting over the legislative elections set for June 10 and June 17.

“We need a majority in parliament,” Jean-Marc Ayrault, who heads the Socialist Party in the National Assembly, said on France 2 television. Former Prime Minister Jean-Pierre Raffarin said, “What’s very important now is to put together a great opposition force.”

Outside of France, Hollande has called for re-negotiating the German-inspired deficit rules that leaders agreed upon in December. At the same time, he reached out to France’s neighbor and biggest trade partner.

Franco-German Cleavage

A German government spokesman said diplomatic contacts had been made with the Hollande camp. Pierre Moscovici, his campaign chief and a possible key member of the future government, told Frankfurter Allgemeine Zeitung newspaper on May 5 that the new government would not create a “crisis” with its main partner.

German Finance Minister Wolfgang Schaeuble indicated May 4 enough flexibility to allow Hollande to “save face.”

“I’ve said that everybody who gets freshly elected into office must be able to save face,” Schaeuble said. “So we will discuss this with Hollande in a very friendly way. But we won’t change our principles.”

Concern of a Franco-German cleavage undermining economic policy making in the euro region is “exaggerated,” Morgan Stanley chief economist Joachim Fels wrote in a note yesterday.

A native of Rouen, the Norman city where Joan of Arc was burned at the stake by the English in the 15th century, Hollande has spent his career mainly behind the scenes and kept his position as party leader even after two humiliating Socialist losses under his watch -- in 2002 and 2007.

In 2007, Segolene Royal, the mother of his four children, lost to Sarkozy. In the subsequent months, she announced their separation. Hollande now lives with Valerie Trierweiler, a journalist for Paris Match magazine.

To contact the reporter on this story: Helene Fouquet in Paris at hfouquet1@bloomberg.net Mark Deen in Paris at markdeen@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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