From Merkozy to Growsterity
France’s change in leadership gives Europe a chance to rethink how it handles the ongoing crisis. Seizing the day could avert that the current Greek electoral mess and rebellion might become the norm in other Eurozone countries.
The ousting of President Nicolas Sarkozy in France was no surprise; his Socialist challenger led the polls for six months, so markets had time to adapt to the change in regime and hence didn’t overreact on Monday after the French election. If at all, they were more concerned about developments in Greece, where an apparent leadership vacuum may now jeopardize the whole Greek rescue plan.
Market participants do grasp that François Hollande does not have much room for economic experimenting. France faces persistent challenges: a government debt dynamic still not under control, an unemployment rate rising significantly, and competitiveness issues long needing to be addressed. Hollande’s allusion to the debt already in his victory speech shows that he is not a dreamer.
The 2012 election lacked the exorbitant, unrealistic promises which have always been a leitmotiv of past French presidential campaigns. So with fewer promises, there should not be too many disappointments. François Hollande knows perfectly well that he was not elected on his program alone, that especially among centrists who gave him their vote, many rejected the incumbent President Nicolas Sarkozy outright.
Hollande’s election could, however, change the way Europe addresses its present crisis. The defeat of the incumbent French president is also the defeat of the “Merkozy” philosophy, i.e. the view that austerity alone is the way for European countries in crisis.
In recent weeks, in the face of the likely defeat of Nicolas Sarkozy and after the downfall of the Dutch government, Germany has already alluded to a possible shift from “austerity alone” to “austerity with some growth component.” Mario Draghi, the European Central Bank President, gave similar hints. Both Spain and Italy, ruled by conservatives, have stated that their deficit reduction paths were too ambitious, the forecast horizons not realistic. The Greek elections saw the defeat of the traditional, pro-European and austerity-backing parties. Finally, Chancellor Angela Merkel’s party did not fare well in regional elections in Schleswig-Holstein.
In the new context, France could play a different role than previously. Economically, it can be seen neither as a North European country nor as a South European country. Hence, after having been the faithful shadow of Germany, France could now take the lead of Southern Europe in asking that growth play a role beside credible austerity.
While credible instead of “extreme” austerity is needed at a national level, growth impulses can be implemented credibly only at the European level, since otherwise they would contradict the saving objectives of the national governments. Such a plan needs to be discussed at upcoming bilateral and multilateral European meetings, with François Hollande as newcomer. A revised or amended “fiscal compact” could pave the way toward a fiscal union much better than a “fiscal compact” alone.
Remember – a fiscal union is built upon two equally important pillars: fiscal coordination and transfers. The fiscal compact treaty addresses the former; many European countries are now struggling to implement austerity. Transfers have not been discussed seriously yet. A Europe-wide growth program could give first impetus.