Will the French election this spring spell the end of the euro?
01/06/2012 8:30 am EST
And, no, I don’t mean the Republican primary in New Hampshire on January 10.
I’m talking about a race where one contender has compared his opponent to a sugar cube, where another calls the incumbent “The Bonsai,” and where the incumbent thinks his best hope for re-election might be reversing his no new “generalized” taxes pledge.
And, where the results could throw the EuroZone into such complete chaos that it could lead to the end of the euro.
I’m talking about France, of course, where President Nicolas Sarkozy currently doesn’t have a truffle’s chance in Lyon of winning the April 22/May 6 double-elimination election.
There’s a serious issue here beneath the sheer entertainment value of an election where one candidate (Dominique Villepin) calls his opponent (Sarkozy) an uncultured oaf. Sarkozy is committed to making the euro work and he’s developed a working relationship with Germany’s Angela Merkel that has crafted the current solution (such as it is) to the euro debt crisis. (For more detail on the Merkozy solution to the crisis and what it would mean for the EuroZone if it is implemented, see my December 23 post http://jubakpicks.com/2011/12/23/lets-say-merkel-and-draghi-get-the-eurozone-to-follow-their-plan-then-what-do-the-european-and-global-economies-look-like-next-year/ His main opponent and the current leader in the polls, the Socialist Francois Hollande, has made it clear that he thinks Sarkozy has given away too much to Merkel’s Germany. He has more than signaled his opposition to the treaty of fiscal discipline that Merkel and Sarkozy worked out at the last European summit going so far as to say that if he is president, France will never sign. Hollande’s solution to the euro debt crisis is so radically different from Merkel’s that it’s hard to see how the two countries could bridge the gap.
And without the German-French partnership it’s hard to see the euro surviving, frankly.
Think the markets might freak out over this possibility if Hollande is still leading in the polls in, say, March?
So just how cooked is Sarkozy’s oie?
- He’s trailing Francois Hollande and barely beating the extreme right-wing candidate Marine Le Pen in the polls. On the current polling Sarkozy would get past Le Pen in the April 22 first round voting but then lose to Hollande in the second round by 10 percentage points.
- The results will be even worse if France loses its AAA credit rating before the April vote. That would be a huge blow to French pride and Sarkozy would take the blame. You can tell he thinks the loss of the AAA rating is a real possibility because in recent days the French president has been saying that the rating is no big thing.
- Unemployment in France has climbed to near 10% and looks to go higher as the country heads toward a recession in 2012.
- Did I mention a likely recession? The government is hoping for 1% growth in 2012; it is unlikely to get it.
- Sarkozy’s plan for increasing the competitiveness of the French economy—and thus of upping the country’s growth rate—is something called the “social VAT.” This plan—which faces daunting odds of getting past French legislators during the narrow window for action open in January—would turn costs now paid by French companies to costs paid by French taxpayers in an effort to close the gap with Germany and other EuroZone exporters. Taxpayers would face a higher VAT (value-added tax, a form of sales tax). It’s hard to see why taxpayers would decide this didn’t violate Sarkozy’s often-repeated pledge of no new taxes. I doubt that the fine print, which reads, no new “generalized” taxes, would be enough to get him off the hook. (And an increase in the VAT seems pretty “generalized” to me anyway.)
Hollande has decided that Sarkozy is vulnerable on the economy because he ran for his first term promising to make France more competitive and he has wound up presiding over falling employment and falling incomes. The policies of austerity that France has adopted—along with Greece, Italy, and Spain—will only make this worse, according to Hollande. France needs to stimulate growth rather than cut budgets, Hollande has said. A policy of austerity like that enshrined in recent EuroZone “solutions” to the euro crisis dooms Europe to years of shrinking social services and falling incomes. Instead of calling for lower government deficits as a solution to the euro debt crisis, Hollande argues, EuroZone governments should have pushed the European Central Bank into becoming the lender of last resort for the worst pressed EuroZone governments.
That puts Hollande on a direct collision course with the German Bundesbank, with the German members of the European Central Bank, and with the government of German Chancellor Angela Merkel. All these folks—plus the governments of Finland (consistently) and the Netherlands (most of the time) and Austria (to a degree)--have argued an interpretation of central bank rules against the bank funding national governments that would prohibit a Federal-Reserve style program of bond buying to support the prices of sovereign debt. In addition this same group has argued that supporting the sovereign debt of troubled EuroZone members would discourage the kind of budget and economic reforms needed to reach a long-term solution to the current crisis.
But Hollande seems to have concluded that being seen to be on a collision course with German-advocated austerity isn’t a political problem but a political opportunity. The problems now facing France aren’t merely a result of the pursuit of the wrong economic policies, he says, but also—and mostly—a result of Sarkozy giving away too much of France’s independence to Germany and to EuroZone institutions. So, for example, fiscal discipline treaty is wrong because austerity as a way to solve the current crisis is the wrong policy, but also—and mostly—because it would give European institutions such as the European Court of Justice and the auditors of the European Union power to rule on the French national budget.
That would be the beginning of the end of French sovereignty, Hollande often suggests. That’s a powerful emotional argument in the home of the French Revolution, Napoleon, and the Sun King.
There is, perhaps, a way to compromise these questions if Hollande wins. But frankly given the heat that he is bringing to this issue in this election, no compromise would be easy or quick. Hollande has called for a renegotiation of the fiscal discipline treaty. I don’t think that necessarily results in a different treaty than the one now being written for presentation in January, but at the least it would require the appearance of renegotiation—with all the time that would require.
And perhaps there is no way to compromise. Sarkozy went into his negotiations with Merkel on this treaty determined to protect France’s financial independence. That he got so little of what he had indicated he would ask for before these meetings shows exactly how little Germany is willing to budge on the issue of independent oversight and EuroZone enforcement. (Sarkozy after all isn’t the only EuroZone leader with political problems. Merkel is struggling to keep her own coalition together.)
If Germany isn’t willing to budge and a new French president feels committed to protecting France’s financial independence, the two central countries in the EuroZone would find themselves at loggerheads and certainly unable to lead the rest of the 17-nation group to any agreement.
And that, given the seriousness of the euro debt problem, and this week’s threats from Greece to leave the euro, would take the crisis to a whole new level. It’s not like there’s a country standing in the wings ready to take over the leadership role from Germany and France. The only institution then with the standing and the power to move would be the European Central Bank, which has so far demonstrated that it won’t take on this role. (See my December 21 post for more on how far the bank is willing to go and the Ponzi scheme that threatens to produce http://jubakpicks.com/2011/12/21/eurozone-banks-move-two-thirds-of-the-way-to-funding-their-refinancing-needs-for-2012/ )
The financial markets haven’t yet devoted much attention to the French election and the consequences of a Sarkozy defeat. Right now what attention is focused on the euro debt crisis is studying the results of the bond auctions by France, Spain, and Italy to see if these countries can refinance and at what price.
But after February the bulk of the bond auctions will be completed and the French election won’t be possible to ignore. If Sarkozy still trails and if Hollande is still running against German austerity and the fiscal discipline treaty, you can expect that economists, analysts and investors will start to worry.
If a Germany and a France in agreement couldn’t end this crisis, what happens when these two countries pull and push in opposite directions?
Now doesn’t that promise to be more interesting than the Iowa caucuses?
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/