Archive for category Sarkozy

A Good Election for France and the EU

Socialist François Hollande defeated conservative Nicolas Sarkozy 52% to 48% to bring the Socialists back into the Presidency for the first time since François Mitterrand left office in 1995.   Angela Merkel’s partnership with Sarkozy – Merkozy, as it was called, had defined the plans to save the Euro and prevent the financial crisis from escalating.  Now that is in doubt.

Meanwhile in Greece elections look to show the two main parties, PASOK and New Democracy, could well fall short of having the capacity to build a coalition.  They are the only parties supportive of the bailout plan for Greece.   The rise of the far left and far right against the plan suggests that Greece could face a future without the Euro, especially if Hollande scuttles the “Merkozy” plans.   Financial markets in Europe are gripped with uncertainty as the Euro falls in value from about $1.33 to $1.29.   What does this mean?

The Greeks suspect that the severe cost of “austerity alone” simply means they’re paying to protect the big banks.

Americans and Brits tend to look at the EU with a jaundiced eye.   Americans especially don’t get it.   They don’t see how countries can link their destinies like that.   Others don’t like the EU and want it to fail so they hyperventilate over every crisis or bit of bad news.   That’s been going on for nearly 55 years and so far the EU has managed to grow and expand rather than fail.   Talk of the EU collapsing or even the Euro disappearing are way overblown.   The EU is not in danger, and the worst I can imagine for the Euro is that the number of participants could decrease by one or two.

What this means is that the Europeans will shift from an austerity focused German led recovery effort to one that is more nuanced and willing to challenge financial markets and big banks.   Austerity hasn’t been working out too well anyway.   Germany’s been the healthiest but Great Britain’s austerity has caused a second dip into recession and Greece is enduring a downward spiral.    The German economy is fundamentally healthier than others in Europe (and arguably our own), so they’ve avoided that kind of pain.

David Cameron ponders “what next” after his budget cutting helped push Great Britain into a double dip recession

Ultimately, a shift away from a Germanocentric policy is good for the EU.   German led austerity is not sustainable.   It will lead to resentment of the Germans, anger at the politicians, and the rise of the far right and far left.   Hollande will force Merkel into a partnership of the right and the left, and that’s always been good for Europe.

Consider:  Social Democrat Helmut Schmidt and conservative Valery Giscard D’estaing helped put aside the crises of the 70s and forge a stronger community.    Conservative Helmut Kohl and Socialist François Mitterrand were the forces behind the creation of the Euro and the expansion of the EU.    Europe does best when its Franco-German engine powers a vehicle with a wheel on the right side and one on the left.   Both wheels on one side make it unstable.

François Hollande is not a raging ideologue.   His first moves after the election was to contact Merkel, assure financial markets, and receive an invitation from President Obama to visit the US.    As President Obama learned, it’s easy to rail against the system when you’re on the outside; once you have power there are many subtleties of policy that have to be considered.

Expect Hollande to fortify the resolve of those who want to reject austerity as the primary policy for the EU.   It’s not that there isn’t a debt problem; Hollande notes openly that at 80% of debt to GDP, France has a debt problem.   Rather, solving that and getting out of this crisis by focusing on austerity and budget cuts alone is economic foolishness.

Merkel and the Germans are very influenced by economic theories that emphasize avoiding debt and accepting recession as “necessary medicine” to correct economic imbalances.   To them high debt precipitated this crisis and it will not end until debt is reduced and a proper balance is restored to the economy.

Celebrating Hollande’s victory

Hollande and others argue that a country in recession could be unable to get out of it if there isn’t something to stimulate economic growth.    One can imagine setting budget priorities to stimulate growth but cut unproductive spending.

This is not in direct opposition to Merkel.   Germany’s success has focused on stimulating job creation in other ways and restructuring the German economy.   She has never proposed austerity along as a solution; rather, budget cuts and debt reduction have to be part of a broad range of plans.   This means there are plenty of areas for Hollande and Merkel to find common ground.

Moreover, Hollande’s approach requires international cooperation.  No one state alone can handle this, the EU and even cooperation between the EU and the US is more important than ever.   The problem is to assure currency stability despite high debts and the messy process of economic rebalancing.   For Hollande would throw a grenade into the works of the EU would be self-defeating and he knows that.

Hollande was not Merkel’s choice, but they will be forced to work together

On top of that, Merkel faces an election in 2013, and her party has been hurt in recent state wide elections in Germany.   The political reality within Germany suggests that she needs to take into account the need to take seriously the negative implications of budget cutting alone.    Germany’s economy has been the envy of the industrialized world since the crisis started in 2008, but austerity within the EU would drive down demand for German exports and could cause a contagion recession for Germany.

Up until now the EU has had an unsustainable plan to handle the impact of the financial crisis.  It’s relied on German money and German leadership but hasn’t addressed the need for countries who have had inferior economic policies to rejuvenate growth as part of the solution.   The focus has been too much on debt reduction and too little on the costs of austerity.   With Cameron’s UK sinking into a double dip recession, his “debt reduction first” model is in severe doubt.

François Hollande is in a position to help nudge Merkel and the EU into a more broadly accepted path forward.  If the Greeks don’t want to participate, fine — let them have the drachma back.    At this point European banks are better prepared for a Greek default than they were a year ago, the system can handle it.    If that happens, the inevitable disaster that will hit Greece will pressure other troubled states to avoid the Greek way.   That, plus a set of policies more sensitive to the dangers of austerity will make it an easier sell.   Contrary to conventional wisdom, Hollande’s election will aid EU efforts to handle this crisis, help stymie the rise of the far left and far right, and may push Merkel in a direction that will help her win re-election.


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!


Sarkozy and Merkel

Governments and central banks are doing all they can to prevent a devastating collapse of the Euro, which could potentially create panic in the US and a global economic meltdown right at a time when conditions have started to improve.    Can they succeed?

They say that every crisis holds an opportunity.   The key to avoiding collapse and coming up with a long term solution for the Eurozone is to expand and deepen European unity.   Rather than tearing the EU apart, this crisis could make it a more cohesive unit.   What doesn’t kill the EU, only makes it stronger.

So as markets worry about the potential of a real crisis should the Euro fail, Sarkozy and Merkel hold the key to the Euro’s future.  While we still think in terms of sovereign states, globalization has connected the financial system to such a degree that a Euro collapse could mean a dollar collapse.    Contagion from big banks in Europe can sweep through the US and even China and the third world.

Euroskeptics — those who opppose the EU and the effort to unify Europe — seem to be on the rise.   In polls national governments trying to save the EU find support dwindling as distinctly nationalist rhetoric takes over.   A lot of people look at this and say “see, the people are rejecting the EU, it’s going to fail.”   But that overlooks one important fact: EU supporters may be a minority in many countries, but they have money and power.   To borrow a phrase from OWS, the “1%” are adamantly behind the EU and the need to save the Euro.   Businesses and corporations would face higher costs and chaotic conditions should the Euro fail.

Even in democracies money talks.   The capitalist class, the elite, ‘big business’ — whatever you want to call them — are determined to save the Euro.   That’s why I’m convinced it will be saved.

On Friday Chancellor Merkel will address the German Bundestag a day after French President Sarkozy gave a speech calling for a “refounding of Europe” and promising that he and Merkel would meet Monday to develop a plan to expand qualified majority voting (making it easier to pass binding policies on all) and enhance coordination of fiscal policies.   It all looks like a well choreographed political dance.

Sarkozy takes the lead, something the Germans have almost always wanted the French to do.  The French like that role, and it softens perceptions that the Germans are dictating what to do to the rest of Europe.   Even 65 years after WWII Europeans are sensitive to that!    At the same time European Central Bank head Mario Draghi promised that if the political leaders could reach agreement, the ECB would take stronger action.   The ECB has been criticized for not doing enough, this signaled a potential change.

In the US, the Federal Reserve announced it was approving temporary dollar liquidity swap arrangements, essentially meaning that the US would loan money to European banks to help it through a potential crisis.   This does two things.  First, it buys time meaning that some kind of set back in European talks doesn’t mean disaster.   Second, it signals to the EU that the US is on board with making saving the Euro a priority.   This is not an act of charity — US banks and the US financial system would be devastated by a Euro collapse.

Dark blue states are in the 'Eurozone,' the other light blue states are in the EU, with year of membership noted. This map does not include Estonia in the Eurozone, though it joined this year

A lot of people have criticized the Eurozone for having monetary union before fiscal union.   How, people ask, can you have one monetary policy and 17 separate fiscal policies?   But while that question seems to imply that the monetary union was a bad idea, it could also be seen as a reason for the monetary union — the monetary union was meant to make coordinated fiscal policies a necessity.   Monetary union would lead to fiscal policies becoming more similar.

Indeed, the rules underlying the EMU were meant to enforce fiscal restraint — debt was to be below 60% of GDP and deficits no more than 3% of GDP.   These rules, however, got brushed aside both as Germany’s cost of unification created higher debt than would have been allowed (they’ve since passed a balanced budget amendment) and a recession in the 90s led to a softening of the rules.   When the boom of the bubble years came, Europeans like Americans got fooled into thinking the good times would last.   Efforts to promote fiscal discipline faded.    The imbalances grew rather than contracted and the result is a Eurozone crisis.

Thus it falls to Nicholas Sarkozy and Angela Merkel to continue the Franco-German engine of the EU.    This duo is not the first.   Konrad Adenauer and Charles De Gualle signed the Franco-German friendship treaty and worked hard in the early days to make the then “European Economic Community” of six nations a success, building a customs union by 1967.

In the seventies as the EU suffered oil shocks and sharply divergent monetary policies, Valery Giscard d’Estaing and Helmut Schmidt not only promoted very important institutional reform, but they set in place the European Monetary System that began the move to monetary union.  In fact, in the late eighties in retirement they publicly called for a push towards EMU, starting the discussions that would lead to Maastricht.

In the eighties and nineties a new duo, French Socialist Francois Mitterrand and German conservative Helmut Kohl worked tirelessly to make European union a reality, and were the most important actors behind the push to not only pass the Maastricht agreement but to persevere politically even when people in their own states doubted its wisdom.  Kohl was an especially committed and foresightful Europeanist, believing European stability required European union.

Each step of EU development has seen a strong Franco-German force behind the moves.    Now its time for Merkel and Sarkozy to join the Franco-German duets of the past to not only put forth a plan to rescue the Eurozone, but also to take this crisis and use it as an opportunity to move the Eu forward.   Are they up to the task?  I wouldn’t bet against them.