Hollande cannot be ultra radical
FOR the third year running, Greece has managed once again to steal the limelight in the month of May. The Greek elections have managed to eclipse the results of the French elections, which resulted in one of the biggest political shifts seen in a major European economy in almost two decades. While events in Greece, no matter how severe, are only temporary and will be resolved for better or worse in a few months time at the latest, President-elect François Hollande will be in power for five years, which is plenty of time to majorly affect French politics and its economy.
UNITED THEY STAND
A “united” Eurozone under the strong leadership of Chancellor Angela Merkel and President Nicolas Sarkozy (who steps down today) with the help of the European Central Bank and the International Monetary Fund has just about managed to restore some calm and trust through the agreement to implement austerity measures across Europe. Hollande is not outright opposed to austerity measures, but is of the opinion that these measures are too harsh and are unnecessarily choking the economic recovery. Instead, he wants increased spending and debt, in an attempt to kick-start the French economy.
Opinions vary widely on Hollande’s position. Some see him as the saviour of Europe, bringing back growth and jobs and putting an end to the so-called “madness” of extreme austerity. Others think his election is a sign of the beginning of the end for the euro, as he causes instability and loss of confidence resulting in an impoverished Europe for years to come.
Inevitably, promises made during an election campaign and the reality of putting them into action once elected are two different things. Real change is very hard to come by, as there are just too many limitations and obstacles preventing changes from becoming as radical as originally intended. Often it doesn’t take very long until disappointment sets in with the electorate and approval ratings are taking a big tumble – some would say that President Obama and Prime Minister Cameron are prime examples, both having fallen out of favour very quickly with a majority of voters.
Outside of France, Hollande appears to be rather limited in what he can do. Not only has Merkel already voiced her opposition to any changes in the stability pact, but other struggling countries like Spain and Italy – although no doubt tempted by the prospects of stronger growth through increased spending – will most likely refrain from doing so, or only to a small degree, as the risk of returning instability in financial markets is simply too a price too high to pay (at least for now).
SOCIALISM’S FAILINGS
Hollande is also considered to be less radical than former Socialist President Mitterrand. Mitterand’s election in 1981 as the first socialist president of the fifth republic came for many as a surprise. Initial reforms leading to the nationalisation of banks and other companies and an increase in wages turned out to be highly unsuccessful in tackling the struggling economy, forcing Mitterrand into a U-turn just a few years later. Also, the relationship with Germany turned out to be much better than expected, with both conservative Chancellor Helmut Kohl and socialist President François Mitterrand working closely together on many important issues concerning Europe.
We need to wait to see what kind of spending measures Hollande will put into action, but senseless giveaways will probably receive instant and severe punishment by financial markets – mainly through higher French bond yields and tumbling stock markets.
The election of Hollande might not necessarily be helpful and constructive in combating the European financial crisis. Unity within the Eurozone could suffer, making it more difficult to provide swift and decisive action in case of an emergency. However, an early outright confrontation between Hollande and Merkel is unlikely as is an open rebellion by Hollande against all austerity as long as growth within Europe and the financial crisis itself don’t continue to take more turns for the worse. Instead, initially it is expected that politicians will try to work together to try to find common ground, not necessarily because any of them has the desire to do so, but rather because nobody wants to be held individually responsible for tumbling stock markets and sharply rising bond yields.
Markus Huber is a senior trader at ETX Capital.