May 7 (Bloomberg) -- It would be a mistake to interpret the election of France’s socialist presidential challenger, Francois Hollande, as portending a seismic shift for Europe’s second-largest economy.
All indications are that Hollande doesn’t owe his victory to any passion among the electorate for a sweeping left-leaning platform. The defeated incumbent, Nicolas Sarkozy, is merely the latest leader felled by Europe’s economic crisis and the lassitude of its citizens. His flamboyant, hyperkinetic persona had grown jarringly dissonant with the grayness of the times and undermined his demands for belt-tightening and sacrifice by his countrymen.
In this respect, at least, Hollande is his opposite. He exudes an almost-studied lack of charisma, projecting the kind of sobriety and seriousness -- blandness, even -- that has earned him the nicknames of Monsieur Normal, and Flanby, after an unexciting mass-produced caramel pudding.
However different their images, the two candidates were never all that far apart on substance. Both have recognized that no pain-free solutions exist for France’s, and Europe’s, deepening economic malaise. Both have vowed to defuse the time bomb of the country’s record 1.7 trillion-euro ($2.2 trillion) debt, now at around 86 percent of gross domestic product. And both correctly said that one of their top priorities would be to bring down the unemployment rate, which is at a 12-year high of 9.8 percent.
To move ahead, Hollande favors a little more spending; higher taxes on wealth; a little less austerity; and generally, preserving or expanding, rather than cutting, France’s social-safety net. Sarkozy campaigned on a vow to cut taxes for business and continue the reform of entitlements that he had begun by raising the retirement age to 62 from 60 and easing restrictions on the labor market, such as the 35-hour workweek. These are changes around the margins, concessions to their respective political bases.
That is why the markets took the change in stride. Ten-year French debt yields were 124 basis points higher than comparable German securities. That’s down from 145 basis points after Hollande won the first round of voting on April 22 and lower than the 133 basis points at the start of the year. Far more alarming was the uncertain outcome of the vote this weekend in Greece, which triggered the biggest rout on the Athens Stock Exchange in four years.
The turnover in the Elysee Palace, however, is far from meaningless. It could, in fact, have a salutary effect by forcing Germany to abandon its obstinate insistence on the drastic austerity measures that have driven economies from the Netherlands to Spain back into a recession.
Hollande has made clear that he will be less compliant than Sarkozy in the face of Germany’s demands. He has promised to renegotiate the fiscal pact agreed by European leaders in March, and to temper its emphasis on budgetary discipline with measures aimed at spurring growth, including an increased role for the European Investment Bank in boosting infrastructure spending.
We have said before that German Chancellor Angela Merkel needs to budge from her my-way-or-the-autobahn approach to the debt crisis. A little resistance -- which Hollande has said he will offer -- from Paris might be just the ticket. Germany must do more to help struggling countries, such as Italy and Spain, to avoid a spiral of sputtering growth and ballooning deficits. That means Europe’s largest economy must either transfer funds to its partners or enact policies that prod its consumers to buy more from outside Germany’s national borders. Increasing German demand by a percentage point would lift output in the euro area by about half a percentage point.
Shift to Growth
Hollande also has said he will push Germany to agree to measures that could boost short-term growth, whether allowing the European Central Bank to act as lender of last resort or issuing euro-area bonds jointly backed by all the currency union’s members. Germany, Hollande said in an interview published by Slate today, “cannot block both,” as it has done until now.
The new French leader is right to insist that Germany back down from its single-minded insistence on punitive spending cuts in the euro area. Spain and Greece, for example, need more time to bring down their debt. The requirement in the March budget pact that they slash education, research and development, and other spending is a prescription for prolonging the crisis. In the Slate interview, the president-elect correctly pointed out that if the austerity measures aren’t supplemented with some pro-growth policies “it will be difficult, if not impossible, to reduce deficits and keep debt in check.”
Any fresh European economic packages should also recapitalize the euro zone’s troubled private-sector banks so they can begin lending again. Merkel has refused to give ground here, too. Prodding from Hollande could break the deadlock.
Will his presidency follow the profligate model of France’s last socialist president, Francois Mitterrand? Such concerns are overblown. Hollande hasn’t been given a mandate to transform France, but to save it from disaster. A poll last week showed that 62 percent of French people believe that in coming months or years their nation could be in the same perilous situation as Greece or Spain are today. The French people may have voted, to some extent, against the harshest forms of austerity, but they, and Hollande, know that reckless spending, protectionism and denial about the unsustainable path of France’s social welfare state aren’t the way to avoid Greece’s fate.
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