Europe’s Unlikely Savior

04/19/2012 10:12 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

The Socialist frontrunner in the upcoming French presidential election would shake up European politics with his insistence that growth take precedence over austerity, writes senior editor Igor Greenwald.

The best and possibly last hope for saving Europe from its self-defeating policies is a career politician who’s never held power, and whose economic prescriptions veer so far left they give some traders nightmares.

All that Francois Hollande has to do to overturn the establishment’s thoroughly rotten apple cart is to maintain his standing with French voters for another 2 1/2 weeks. That would transform him from an upstart Socialist challenger into the president of France. And at that point, austerity’s days will be numbered.

Hollande is narrowly favored to nip incumbent Nicolas Sarkozy in Sunday’s preliminary round, which will narrow the presidential field from ten to two. He’s also consistently led polls matching them head-to-head ahead of the May 6 runoff.

Hollande’s promised to jack up taxes on the rich, roll back a hike in retirement age, and hire thousands of teachers. He’s called for heavier regulation of banks and markets, having labeled the financial system his “real adversary.” He’s also pledged to promote economic growth at the expense of the current austerity push.

This is not a program that sits well with German Chancellor Angela Merkel, who’s already endorsed Sarkozy’s re-election. Nor would it be easy to execute while France’s currency and monetary policy remain under control of the European Central Bank. Traders would almost certainly sell French government bonds in response to fiscal laxity, pushing up borrowing costs.

Austerity has been no help at all to the holders of Greek, Irish, Portuguese, and Spanish bonds. And yet the alternative of underwriting big deficits without actual or implied guarantees from countries in the prosperous European north plainly terrifies.

Still, this is another case where a little turmoil now is better than a cataclysm later, which is where Europe is currently headed as it pushes its weaker economies one by one into depression.
Hollande is the only European politician saying as much with the near-term prospect of achieving the power to change course. Of the other four big European powers, Germany, the UK, and Spain are run by conservatives committed to austerity, and Italy is managed by technocrats in their thrall.

That would change the day after Hollande’s election. He’s already promised to renegotiate the recent European treaty, pushed by Germany, mandating strict deficit limits during economic downturns, when budget cuts are in fact most harmful. Hollande has also demanded new powers for the ECB, though good luck wringing those out of Merkel.

More usefully, Hollande would immediately deprive Germany of important political cover. With France on board, austerity can be sold as a European choice. Without it, it becomes the pet cause of Germany and a few of its northern European satellites, all of whom have disproportionately benefited from the single currency at the expense of the countries now getting squeezed dry.

Few politicians in the north are eager to tell voters the uncomfortable truth that their prosperity has been built at the expense of their neighbors and allies, who are only now paying the price because the trade imbalances can no longer be propped up via heavy borrowing and real-estate speculation.

If Spain and Italy and France are to continue using the same currency as Germany, the Germans will need to make a heroic effort to spend the savings of which they’re so proud, since they’re no longer willing to recycle them to the European importers of their products.

With money fleeing banks on the European periphery for Germany and Switzerland, it won’t be long before Germany’s European trade falters. Hollande has already argued that austerity doesn’t serve German interests either, and he could pay Merkel back for her endorsement of Sarkozy by making that case over and over again ahead of a German election due next year.

This is not how European politics work, of course. France and Germany have been politically inseparable for 60 years, and would almost certainly try to paper over the wide rift between Merkel and Hollande if the latter won. But the Frenchman has been so blunt in his campaign that there’s only so much backtracking he could do without appearing to capitulate. And he’d be unlikely to give much ground in the aftermath of an election victory.

All the pressure would be on Merkel and austerity’s other proponents to explain why the policy has been such a failure to date, and when it might finally bear fruit. And as the days of economic and political reckoning nears, they might even decide that it’s a policy worth diluting here and there.

So Hollande, the “ordinary guy” the markets have grown to fear, could yet prove their savior if he gets Europe off the wrong track economically.

The first rule for getting out of the hole is to stop digging. If Hollande gets elected, it will be for that reason and no other.

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