France goes on a holiday from financial reality and makes Sarkozy pack.
The future of the European Union (and worldwide markets) may hinge on the following question: Is François Hollande a “fool or a knave”?
Hollande, seeking to become France’s first Socialist President since François Mitterrand, won a narrow victory Sunday over Nicolas Sarkozy – ending the Fifth Republic’s brief and troubled flirtation with mildly conservative economic policies. Hollande’s election was not only a victory for a Socialist Party in political disrepair but for his former domestic partner and 2007 Socialist nominee (remember, it’s France) Ségolène Royal. Whether his win proves to be a defeat for the economics of the EU will have to wait to be seen. As the UK’s Telegraph details, (having asked the above question about Hollande’s political motivations), France faces extraordinary fiscal challenges:
Today, the top corporate tax is 34.4 percent (compared to 15.8 percent in Germany) and France has a €96 billion budget shortfall, which caused it to lose its high credit rating. The absurd 35 hour week largely remains in effect. Here’s the most damning statistic: government spending now accounts of 56 percent of France’s GDP. It’s only higher in five other countries in the world – including Iraq and Cuba.
Keep in mind, these figures were after 5 years of Sarkozy’s supposedly “draconian” policies and political rule by his center-right Union pour un Mouvement Populaire (UMP). Hollande, in theory, wants to undo the same policies through increased progressive taxation, including the creation of an additional 45% for income above 150,000 euros and capping tax loopholes at a maximum of €10,000 per year.
In an economic era defined by deficit spending and a general lack of funds, François Hollande seems intent to upend the Franco-German alliance that has sought to force austerity measures on the rest of the EU. “Germany doesn’t decide for all of Europe,” Hollande intoned during the campaign. Yet what is the alternative? A nation drowning in debt can no more spend it’s way solvent than a fat person can eat themselves thin.
Marine Le Pen should be proud. The leader of the supposed ultra-conservative (more social nationalist) National Front and daughter of the 2002 run-off presidential candidate announced her intention to leave her ballot blank – a signal to the 18% who voted for her to ensure Sarkozy’s defeat.
Sarkozy would hardly be recognized as “conservative” across the Pond. Three of his ministers were leftists. He pushed for legislation to fight global warming. He worked to help Socialist Dominique Strauss-Kahn become head of the IMF (when Straus-Kahn wasn’t trying to plow room service). Far more damning, Sarkozy’s response to the 2008 economic meltdown was vintage Socialist – declaring that “laissez-faire capitalism is over” and decrying “the dictatorship of the market.” Yet, he raised the retirement age, cut taxes and attempted, unsuccessfully in the end, to ween France off the entitlement teat.
How the markets react may be the most important question in the aftermath of Hollande’s victory. Coupled with the showing of Alexis Tsipras in Greece – whose policies mirror Hollande in a desire to tax the rich and delay debt repayments – the concern over the fate of he EU will renew Monday morning. Greece had agreed to impose pension and wage cuts in return for two international rescues worth 240 billion euros. Either the policy continues or the payments stop. An end to payments would suggest an economic amputation from the Euro Zone, with Greece either leaving or being forced to abandon the Euro. A Greek departure could easily start a domino effect in the EU and send worldwide markets into a tailspin.
Hollande may be forced to continue may of the policies he publicly campaigned against. Short of a desire to commit economic suicide, he has little leverage to do otherwise.