What would markets and Merkel make of Hollande?

February 13, 2012

It’s time I came out of the closet and ‘fessed up. My friends, colleagues and family all know anyway, so ……OK, here goes.

All my adult life I have been and remain a Francophile. It is a perversion I can neither defend nor explain.

Having got that off my chest, I’ve a feeling my position is going to get more uncomfortable than ever over the next few weeks, as the French Presidential Election campaign gets going. Elections invariably expose the most unattractive aspects of any country, but with the National Front breathing down the neck of the incumbent, the immediate outlook for France is distinctly unappetising.

One common factor the French share with the Americans is a belief in their own exceptionalism, which in the current situation translates into a sort of deficit-denial syndrome, where either the fiscal balance is ignored altogether or the need to do anything about it is questioned. This delusion makes it possible for the French Socialist candidate to enjoy a 10%-plus lead in the polls in spite of running on an unreconstructed tax-and-spend platform for all the world as if it were still 1972 and the intervening decades were some kind of dreadful aberration. Not only does M. Hollande want to spend 20 billion euros or more on job creation schemes, he intends to pay for it by squeezing more tax out of the rich, which has to be good news for estate agents in Monaco and South Kensington. That should raise the French government’s share of national income, already one of the highest in Europe, to nearly 60%, and just to prove his insanity, he is also dead set on reversing the rise in the pension age from 60 to 62, a change which marked the highpoint of President Sarkozy’s timid reform programme.

Now it is often said that markets can only ever concentrate on one problem at a time. Certainly that was the way it looked, as for years they remained totally relaxed about the build-up of debt in the ClubMed countries, before suddenly waking up to the fact that Greece was barely months away from default. In recent weeks, they appear to have become calmer, either because they expect an eleventh hour agreement to save Greece or possibly because they have got so used to the endless sequence of last-chance deadlines that they are now reconciled to a disorderly default.

In the meantime, having moved on to worrying about Spain and the biggest borrower of all, Italy, they remain quite relaxed about France, presumably because they are still counting on President Sarkozy to save France from itself.

That confidence may yet turn out to be justified, because if he is able to win reelection against all the odds, he will be well placed to push through the reforms the country so desperately needs, and which he so predictably failed to deliver in his first term. But right now, the odds are stacked against him getting the chance.

The fact that the supposedly cautious Frau Merkel has weighed into the French campaign on behalf of the President tells you how much she thinks is as stake. Facing a general election herself, how on earth is she going to convince her voters to pay up and keep smiling in the name of the European ideal if she has a President Hollande next door embarking on a spending binge? Instead of a France able to make token contributions to the cost of bailing out ClubMed, she could be facing the ultimate nightmare of a France needing a handout from Germany – which would be an economic disaster with deafening historic resonances.

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