Archive for April 23rd, 2012

What the French Election Means

We won’t know for sure the results from France until the second round of voting is completed on May 6, but Francois Hollande’s surprising win on the first round with 28.6% to 27.1% makes him the favorite on May 6th.

First, a bit about French Presidential elections.   They are held every five years and usually draw a variety of candidates. The election is only won on the first round if a candidate receives a majority of the vote: 50% plus 1.   Otherwise, the top two candidates hold a run off two weeks later.   Never has a sitting President actually not finished on top in the first ballot, though often with very low vote totals.   In 2002 an especially angry electorate gave the top candidate of the right, Jacques Chirac, only 19% of the vote and Socialist Lionel Jospin 16%.    The problem was that far right Jean-Marie LePen got 17%, thereby creating a meaningless run off.   The left couldn’t vote for a neo-fascist so they plugged their noses and voted for Chirac, who won with 83%.  Otherwise, the system has worked pretty well.

Marine LePen, daughter of Jean-Marie, focused on the traditional theme of the National Front: Fear.   Her combative tone against foreigners, Muslims, social change and France’s future helped her double the total for the neo-fascist party over her father’s 2007 numbers.  But National Front voters are fickle.   You might think that they’d go to Sarkozy, but historically about 40% stay with the conservative candidate, 30% sit out, and the rest go to the Socialist.   That’s because National Front voters hate foreigners but some have economic views more towards the left.

National Front leader Marine Le Pen

It’s possible that the large vote total for LePen will give Sarkozy a greater proportion than usual; if so, he could pull off a surprise.   It’s also possible that some people who prefer Sarkozy to Hollande might have voted for Hollande on the first round to send a message.   They also have two intense weeks of campaigning ahead.   Still, the odds now favor Hollande.

Sarkozy and his wife Carla Bruni-Sarkozy

In play is the very approach the EU takes to the Euro-crisis caused by weak economies in the south.    Led by German Chancellor Angela Merkel, the EU response has been to push for austerity from debt ridden countries.   The idea behind this is that debt is such a cancerous and pernicious force when it reaches levels over 100% of GDP, but no economy can be fixed without first reducing debt to GDP ratios and getting the budget under control.   Moreover, that’s the only way to protect the viability of the Euro.

It’s been a hard sell.   The economic impact of austerity has been profound in Greece, Spain and elsewhere; it’s led to an intensification of the recession.  That cuts revenues further and creates the danger of a downward spiral.

Enter Hollande.  He is of the school that says that when in recession austerity is not the proper approach.  The main goal is to get the economy growing again.   Austerity is how we responded to the Great Depression and it only made the depression deeper and longer.    He wants to revisit last year’s EU agreement and rethink the approach the EU is taking to dealing with the current crisis.

Hollande and his "companion" Valerie Trierweile - either way France will have an attractive "first lady"

Sarkozy’s camp is arguing that the Merkel-Sarkozy (Merkozy) agreement is necessary to save the Euro, and that a Hollande win will rattle capital markets and threaten another major crisis about the future of the Euro.  The hope is that while the French don’t like Sarkozy’s glitzy style and blame him for not finding a way out of the economic doldrums, they’ll fear Hollande will make things worse.

It gets complicated.   Many argue that Sarkozy and Merkel’s relationship is paramount, and that a Hollande victory would risk undercutting the Franco-German “engine” of the EU.   Others say that Sarkozy has given Germany the leadership role in Europe by bending to Merkel’s will and that Hollande would be a better heir to De Gaulle’s idea of grandeur and leadership for France.   He’d be a leftist foil to Merkel’s conservative economic bent.


This isn’t just about Greece.  French debt is sitting at 90% of GDP and rising.   Many in France fear austerity to cut that debt will hinder growth.    Hollande does say debt must be cut, but also believes the economy needs to be stimulated.   His approach is less like Merkel’s and more like Obama’s — start with a stimulus, try to get the economy moving, and once growth has returned then cut.    But what if growth doesn’t return and you simply end up with more debt?

And for all the grumbling about Merkel’s austerity, the German economy has weathered this crisis better than most.   Indeed, northern Europe, particularly Scandinavia (if you drop Iceland) and Germany have fared better than others in the West.   German debt has also risen, they have an 80% debt to GDP ratio, but the Social Democrats on the left and Christian Democrats on the right agreed to a balanced budget amendment to their constitution and have focused on debt as the major problem.

Yet German success doesn’t prove that their approach is best.   They also did not cut regulations in the financial sector when so many others did, they kept their industrial base alive, and still have a strong current account surplus.   Germany’s fundamentals stayed strong, the French fundamentals are weaker, and Greece is fundamentally flawed.

So this election matters.   A Sarkozy re-election means continuing along the “Merkozy” path with the hope that her economic approach is right — cut debt, then rebuild growth with a stable Euro.   German leadership in the EU will continue, at least until this crisis passes.   If Hollande is elected there will be a vigorous debate about the German way on dealing with the crisis.   Countries like Greece and Italy will have hope that maybe their future isn’t a dramatic drop in their standard of living to pay back debt, but a looser approach designed to bring back growth.

No one knows what Hollande will really do or how Europe will react.  No one can be sure that Merkel’s approach is right, or if austerity is poison.    But this election will make a difference, and frankly, I’m not sure who I hope wins!   I like Merkel and think the German approach is pretty persausive.  But…if it’s wrong that could doom southern Europe and harm the EU overall…   Interesting times!