Tuesday, 8 May 2012

Elections: the French "Go Dutch"

Sorry Hollande... Then again “going Dutch” in English encompasses the notion of paying for one’s own bill. So does Monsieur Hollande’s presidency presage a fundamental shift of French polity in general and in particular as regards the EU and Eurozone?

In recent blogs, I raised the likely scenario of a change in leadership at the Palais de l'Élysée as the wave of popular discontent against austerity in Europe continues to knock existing leaders off their perches.

And that the debate on all things Euro has, with the return of sovereign yield widening, led to a much greater interest on intra-EU political dynamics. Put another way, we are all now watching the debates, political trends and election results within the EU countries much more so than was the case pre-crisis where yield-compression was the order and convergence had purportedly arrived...dream on.

The French result puts into question the continuity of the Franco-German axis as the lynchpin of EU and Euro-centric institutional dynamics. Mr Hollande will want to exercise his genuine belief in French socialism and a resultant focus on government intervention. Whilst this position may mellow in the well-trodden “Euro Summit-itis” where everyone gets what they want in terms of grand-standing but rather meaningless statements, it will definitely affect a whole host of issues in the near term:

  1. Expect a further weakening of the Germanic focus on balanced budgets in the current cyclical downturn as Mr Hollande finds common ground with Euro-Med partners – and even with Holland. With smaller and the newer EU member states privately unhappy with the implications, the Fiscal Compact will increasingly lose its intent and credibility.
  2. Mr Hollande’s focus will remain in the forthcoming parliamentary elections in June so expect continued “noise” that further exacerbates the sense of fissure in the Franco-German template.
  3. An unknown: will a socialist president now insist on further austerity for Greece and possibly in the Iberia should Portugal be asked for further cuts, or, indeed should Spain require of it?
  4. A Growth Compact? As Jeff Sachs has noted in recent days, growth is an outcome and not a policy. Alas, the EU machine and inter-governmental waffle-merchants will continue to come out with these mantras. Too soon to say – the Eurozone crisis is no way near resolved and I expect the iterative nature of EU-decision-making to continue - but expect a tepid change of direction with possible, and relatively small-scale financing via EU Structural Funds and/or debt-financing for project from the EIB – but without any clear-cut framework for growth, or the real pressing issue, of competitiveness.
  5. The Euro will continue its devaluation. And thus the conundrum, particularly for Germany: the devaluation itself acts to help the Eurozone through helping to improve external competitiveness but the impact magnifies on Germany: both for its own exports to the rest of the world but also for exports to the rest of the Euro-zone. Put another way, a falling Euro reduces the German incentive to “go Dutch” and return to the DM.
  6. Continued weakness of the European Commission which is often the glue that holds the various competing national interests at bay. 

Conclusion: Put it together and...Status continued volatility in the Eurozone both politically and economically, no real change in the overall fiscal-monetary mix involving a loose monetary policy and sort-of-coordinated deficits, continued angst in Germany against further bail-outs, continued disgruntlement in the southern EU and a resultant growth path which will remain moribund. 

But what of Greece I hear you ask? Good question..

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