Most opinion polls point to a victory for Francois Hollande over Nicolas Sarkozy in the forthcoming French presidential election. Mr Sarkozy claims that if Mr Hollande wins, the financial markets will punish France, although with only a few days before the first round of voting French markets have been relatively calm. So should the French be focused on the rhetoric of their presidential candidates or instead the reaction of their European neighbours to a leadership change?
French politics are fascinating. For as long as I can remember, French politicians have made promises to get elected and failed to deliver once in office. The lack of reaction to Hollande’s rhetoric is due to the majority of investors not believing a word that he is saying. This is despite the fact that this rhetoric is likely to become even more left wing after this weekend’s first round in order to appeal to the socialist vote. Nevertheless, we believe that it is too complacent to ignore the rhetoric. We believe that Hollande will try to promote a more growth-orientated agenda for Europe. He will find willing listeners in the Southern Mediterranean, particularly in Spain and Italy. But the country that he needs to convince is Germany.
George W Bush once said that “the French are always there when they need you”. Angela Merkel has been content to provide a stealth bailout of Europe through loan guarantees and expansion of the European Central Bank (ECB) balance sheet. However, her own debt break and the Constitutional Court have made her very reluctant to spend German money on bailouts and a growth agenda. Faster growth in Germany will exacerbate the growing inflationary pressures and bring her into direct conflict with the Bundesbank. Merkel’s choice will determine whether France is treated as a semi-core or peripheral economy.
Most people believe that the Bundesbank is irrelevant, outvoted on the 23 member council. The ECB has a mandate for Europe not Germany, but the ECB was supposed to be built in the Bundesbank’s image, not the Bank of Italy’s. There is a danger that the Bundesbank rebels and tries to influence public opinion – this would be dangerous. Europe needs growth and any monetary union can only survive if the rich regions subsidise the poorer regions. Germany has not accepted this and the election of Hollande is likely to bring the issue to a head. Germany will have to decide whether it wants to pay for the single currency or destroy it. Faced with this stark choice, it is likely to pay for it. But it may decide that it does not want all of the current members and that those that remain need to haircut their debt before Germany assumes the enormous financial burden if its own, and the rest of Europe’s, aging societies.
Chief Economist, Co-Fund Manager
Apr 18, 2012 at 11:38am