The political landscape dramatically changed in Europe yesterday with a sea change in France following the departure of incumbent centre right President Nicolas Sarcozy to be replaced with socialist François Hollande. Sarcozy is the first French President since Valéry Giscard d’Estaing lost power in 1981 not to serve two consecutive terms illustrating that the sentiment of the French people has turned. Sarcozy and supermodel wife Carla Bruni had been associated with big money and glamour, which did not sit well with the mood of austerity which has hit France. Hollande is France’s first socialist President in 17 years.
Hollande is promising to increase taxes on the wealthy and rebalance the focus of French economic policy from austerity to growth with an increase in public spending, focusing on infrastructure spending. This is at odds with the European fiscal pact agreed with Germany’s Angela Merkel whose objective was to reduce the Eurozone budget deficits and put them back on a sustainable fiscal footing. Rhetoric during the election campaign may be tempered when Hollande enters the Elysee palace to start his term with very little wriggle room in both the financial markets and his Treasury. How far Hollande will go in upsetting the relationship with Germany is another issue but it is clear that the cosy relationship between Merkel and Sarkozy is a thing of the past. The pendulum has swung against the Franco/German alliance. The fact that Prime Minister Cameron refused to meet President Hollande during the election campaign, instead courting Sarcozy, may have implications for a worsening of relationships between the UK and France.
News of far greater impact on the markets is the Greek election result. The Greeks also rejected main stream parties who had agreed to the county’s austerity programme and voted in Neo-Nazi and communist parties, punishing the main stream. This puts the austerity programme agreed as part of the country’s bail out under threat and may drive Greece out of the Eurozone.
What now for the markets? The Greek election result is bad news for market sentiment and adds to the uncertainty surrounding European debt. Growth is anaemic in Europe with the exception of Germany; Spain, Greece, Italy and Portugal look to be in a precarious position. The euro experiment is being held together by Germany’s strong economic performance, but the bail outs and European Central Bank interventions are a “sticking plaster” on a failed dream of an integrated Europe. How was a one speed Europe under one currency and one European interest rate going to work when the economies are so different? Hollande wants to renegotative the EU treaty on government debt and this is probably music to the ears of the Irish, Spanish and Greek governments.
Lets hope Hollande and Merkel quickly reach agreement on how to solve the eurozone crisis. It is interesting that Hollande favours European Central Bank intervention, in effect issuing Euro bonds to help the weaker countries. Financial commentators have always advocated this approach to stabilise the region, but Germany has resisted. It is time for Merkel to rethink, even though it will go down like a “lead balloon” with her own electorate and jeopardise her own political aspirations. If the ECB does go ahead and become more interventionist this is good news for markets, but in the meantime uncertainty is rife and markets hate uncertainty. Expect market falls this week I would say (FTSE futures are down 82 points and Dow futures down 142 points)
Contrarian Investor UK