French Toast

MacroAndCheese's picture

Today is the first round presidential election in France. As voters head for the polls, incumbent Nicolas Sarkozy is badly trailing his rival Francois Hollande. It is likely that Sarkozy will live to fight one more day, since he is expected to poll second behind his rival to continue on to the runoff election next month. But the consensus among the French is that Hollande will emerge as president.

The strength of Hollande's lead is rather surprising given that along with Germany, France is navigating the financial crisis rather well. Sarkozy has Merkel's explicit endorsement, and though he has had his own share of gaffes, on balance his policies are more moderate and sensible than his opponent's. So why is he losing?

According to my French colleagues, Sarkozy acts like a nouveau riche--he flaunts his wealth and status. This, in France, is just not done. At a time when the French economy is wobbling, Sarkozy's display of the good life, often in exotic locations with his glamorous wife, has not played well among the French populace. With his approval rating stuck in the low 30s for years, Sarkozy has dug himself into a hole.

But Sarkozy's hole will be nothing like the Hollande tunnel. Francois Hollande is a socialist, and his prescription for France's economy is sculpted along socialist lines. He has quite a program in store:

  • Hire 60,000 teachers in a country of 65mm
  • Balance budget by 2017
  • Tax income above EUR 1 million at 75%
  • Reduce consumer utility bills
  • Lower retirement to 60 for those who have worked 41 years or more
  • Reduce payroll tax
  • Renegotiate European treaty
  • Separate commercial and investment banking

By themselves, these planks don't seem particularly onerous, but taken together and put in the context of a European recession, the prospects for the French economy are not good. Much of his platform requires new spending, while the only new revenues to be raised seem to come from his tax on salaries above EUR 1 million, an ineffective red herring political line used around the world. Few Frenchmen fit that description, so the total take will be insignificant.

How Mr. Hollande presumes to balance the budget in four years remains to be seen, but if he follows the path of the other Francois, socialist President Mitterrand, he will reverse course soon after entering office. Mitterrand came to power in 1981 on a very progressive socialist platform, but after two years completely reversed course in what was known as "tournant de la rigueur" (turn to austerity). Such a reversal in the near future, if it comes, would surely lead to a recession and add to the burden of the struggling Eurozone.

There is some chance that voters will in the end come through for the incumbent in the runoff election. It is not politically correct these days to support Sarkozy, so voter response to opinion polls may not be an accurate reflection of what people will do in the booths. But in all probability Hollande will prevail, and come May Europe will have a new albatross around its neck.

 macroandcheese.org