France held the first round of its presidential elections over the weekend, and it spells real trouble for President Sarkozy -- and German Chancellor Merckel. Sarkozy took only 27% of the vote, bested by the socialist party candidate, Francois Hollande. The far left candidate pulled in 11% and can be relied on to offer that to Hollande. The far right took 18%, but their leader shows no inclination to back Sarkozy. Absent an April Surprise, it’s difficult to see how Sarkozy gets reelected on May 6th.
Hollande, the socialist, has run a campaign critical of Sarkozy’s divisiveness, and of the EU approach to its financial crisis. He got a boost early on from German Chancellor Merckel endorsing Sarkozy -- French voters prefer the image of a smart French rider astride a strong German horse to that of a bossy teuton meddling in French elections. Hollande campaigned vigorously on his opposition to the “Merkozy”
In an effort to stave off Eurozone collapse, Chancellor Merckel has intimidated other European leaders into an austerity first strategy. It is now reaching its political limits of acceptability not only in the political periphery of Greece, Spain, Portugal and Italy, but also in the bedrock of the Eurozone. The honeymoon is over for technocratic governments in Greece and Italy; both are threatened by elections to overturn austerity. Spain failed to meet its budget cuts and the newly elected government is facing a public backlash. Even the Netherlands is likely to call elections after their government failed to agree on needed spending cuts.
France now has a debt to GDP ratio of 90%, the level economists Carmen Reinhardt and Ken Rogoff identify as the tipping point at which countries lose the ability to regain their footing. That debt has grown dramatically (from a sustainable 64% of GDP) in 2007, when Sarkozy was elected. Sarkozy campaigned in 2007 on a promise to cut unemployment to 5%; it now stands at 10%.
Sarkozy has run a campaign pulling to the right. If it were Britain, it would be described as a “Little England” approach: reducing immigration by 50%, better border controls, and keeping manufacturing and economic activity in France. Hardly an inspiring vision for France, it shows how vulnerable Sarkozy’s support is to pressure from his right.
But France is in an economic malaise that neither major party candidate has a plausible solution to. Sarkozy promised a growth strategy in 2007 that he hasn’t delivered, in part because of his erratic policies, in part because of the Eurozone crisis he could not control, but also in part because the French people themselves would not free up their economy. France was lucky to have had Silvio Berlusconi’s burlesque in Italy distracting attention from scrutiny of the French economy’s fundamentals for so long.
Hollande promises to renegotiate the Eurozone deal in ways more beneficial to France. Merckel sternly refuses. But the German chancellor is short of allies to continue on her preferred course. Germany got its debt under control earlier than other countries, but is deeply complicit in the policies that encouraged untenable lending -- something Merckel’s dour approach is designed to avoid owning up to. Without France and the Netherlands as flankers, Germany will be unlikely to garner enough support to see the austerity approach through.