AFROZEN economy, sky-high taxes, a debt-burdened treasury and a sulphurous mood in markets that could spark a new crisis: sounds familiar? Welcome to France, the latest staging post in the Euro-zone’s careering caravan of crisis.
Financial markets have awaited today’s first round of the country’s presidential election with growing apprehension. A victory by the Socialist challenger François Hollande propelling him into the second round as clear favourite against the incumbent Nicolas Sarkozy has the potential to spark a major sell-off in both bond and equity markets. Hollande has pledged that he will renegotiate the fiscal stability pact reached with other Euro- zone leaders only after the most tortuous and protracted negotiations. Sarkozy has been battling to close the gap – but he, too, has hinted at modifications in the teeth of public hostility to “Merkeleconomics”.
France’s economy is itself in poor shape and in no state to bear even higher taxes than it does already while the powerful unions are flatly opposed to spending cuts. As if Greece, Ireland, Portugal, Spain and Italy were not enough problems for markets to contend with, French government bonds have been falling and the yield premium over German bonds has been rising – an ominous portent of trouble ahead.
In the face of this, the IMF chief Christine Lagarde has been acting every inch the headmistress, out to impose her will on a fractious and unruly Euro school. If only, she told a meeting of G20 finance ministers in Washington last week, Euro- zone leaders would “keep up” and “implement the reforms that have taken place nationally”, we might – just might – see a real resolution of the Eurozone’s sovereign debt crisis.
Only one thing is wrong with this hopeful vision: politics – and presently French politics.
The two main contenders have been pulled ever more forcefully away from commitments to “keep up” with the fiscal pact to which European Union leaders have only recently signed up.
This committed them to tough debt-reduction measures as the means of restoring confidence in the single currency area.
Sarkozy has come to sound increasingly cool on what seemed last year to be a Franco-German all-pals act. Close association with Merkel has done the French president no favours with voters. And Hollande for his part has threatened a radical change in direction.
A victory by Hollande – and that is what the polls have been predicting for months - could have an immediate complication for Lagarde. It might make it even more difficult for her to boost the IMF’s lending capacity by $400 billion (£250bn) to help see off future debt crisis. The IMF has already received commitments of $320bn. But these could quickly melt if Germany is seen to be isolated.
But this could be the least of the problems ahead. A convincing victory by Hollande today would boost his chances of prevailing in the second round. A victory for the Left, on a programme of nationalisation, the creation of 60,000 teaching posts, the introduction of a 75 per cent tax rate and substantial increases in public spending, could trigger a serious exodus out of French government bonds, prompting questions as to how France’s debts and deficits are to be funded. The country may not be in anything like as severe an austerity trap as Spain and Portugal. But it has big problems to contend with.Public spending is now equivalent to 56 per cent of GDP – a larger proportion than public welfare Sweden. Unemployment is grazing 10 per cent, posing major problems in the suburbs of Paris and other major cities. Its banks have worryingly large exposures to Spain and Italy while public debt to GDP is in excess of 90 per cent. One credit rating agency has already stripped the country of its triple-A status.
Yet voters seem in no mood to countenance the type of austerity budgets adopted in other Eurozone countries. Indeed, there is a deep-seated conviction that high public spending is always and everywhere benign and the alternative of Anglo Saxon market economics a visitation from the Devil. Productivity has slumped and the economy widely forecast to mark time in 2012, if not contract. That such an outcome would be regarded by many in the Eurozone as relatively positive tells us all we need to know about the economic and fiscal state of the single currency area.
What the French presidential elections starkly reveal is the paradox at the heart of the Eurozone. This is an area governed by the rhetoric of economic integration, common approaches, pulling together, shared values and “ever closer union”.
The political reality in many member countries is starkly different. Politicians have played, if not to an inflamed nationalism then to a mood of “don’t involve us”. Either the mission of “ever closer union” was a myth of convenience from the start, or voters in many countries have failed to grasp the seriousness of the mess the Eurozone is in. There is a truculent reluctance to “keep up” as Lagarde puts it, and implement EU-agreed or IMF-urged economic reforms.
The Eurozone “solution” has from the first been couched in the rhetoric of fiscal integration and a regime of budgetary discipline applicable to all member countries. But voters show little desire for this at all, even if their own economies are stagnating and unemployment has climbed relentlessly. To the problem of high government deficits and debt, the solution is seen to appear to lie in ever higher public spending and even higher debt.
Appeals for a joined-up solution, proclaimed at every summit meeting of Eurozone political leaders and finance ministers, do not at all match the mood on the ground. And the problem for Europe’s leaders is that there is no shared language, no common education system or narrative – in short, no European demos. That is what has undermined Sarkozy and propelled Hollande into the lead.
Sooner or later the penny will fall that not just the Euro- zone but the whole of Europe has entered a new era, one for which its populations have been singularly unprepared while their old preferences and predilections are indulged in. The mood in the markets makes it evident that the euro remains the greatest single threat to global recovery, and that unless the political rhetoric in France changes markedly in the coming weeks, that time of reckoning will come sooner rather than later.