France sets new path in debt crisis

With Hollande's election, Europe must deal with a top leader who says austerity is not the answer.

May 07, 2012|Kim Willsher
  • President-elect Francois Hollande waves after a victory speech in Tulle, France.
President-elect Francois Hollande waves after a victory speech in Tulle,… (Philippe Desmazes, AFP/Getty…)

PARIS — With Francois Hollande's election as France's first Socialist president in 17 years, Europe now must deal with a major leader who has promised to push a different approach to resolving the continent's debt crisis.

Hollande's message, that the German insistence on austerity must be tempered with plans to stimulate economic growth, helped propel him to a decisive win Sunday over incumbent President Nicolas Sarkozy, with nearly 52% of the vote. Hollande, 57, is expected to take over May 15 from Sarkozy, who became the first sitting French leader to lose a reelection bid in more than 30 years.

"In the whole of Europe it's time for change," Hollande told cheering crowds who gathered to hear his victory speech in Paris early Monday.

Earlier, in an address in his district of Tulle, Hollande vowed to make his election "a fresh start for Europe" and declared that "austerity need not be Europe's fate."

One of the first calls the president-elect is expected to make is to German Chancellor Angela Merkel.

The message is likely to be conciliatory but firm, a reiteration of his campaign pledge to renegotiate the treaty to limit public spending that Merkel thrashed out with Sarkozy. Having sold himself to the French public as a man of his word, Hollande will not want to start with a broken promise.

But analysts say that Hollande, who favors higher taxation and growth through stimulus spending, actually has little room to maneuver and will need to act fast to placate the financial markets that see him as a threat to Europe's effort to rein in its high levels of public debt.

On Sunday, the Standard & Poor's 500 index futures tumbled 1% to 1,348.90 in early trading, indicating that there would be a decline in U.S. stocks Monday morning. In Japan, the Nikkei 225 index was also heading downward.

France's crippling debt burden saw it lose its coveted triple-A credit rating this year. With the jobless rate nudging a record 10%, coupled with stuttering growth and declining industry, Hollande faces major challenges and must hit the ground running.

After his swearing-in next week, he is due to fly to the U.S. the next day to attend the Group of 8 meeting at Camp David and the North Atlantic Treaty Organization summit in Chicago.

In the intervening 24 hours, Hollande is expected to try to fit in a visit to Berlin to see Merkel. Relations between the two leaders, whose countries are the heavyweights of the European Union, could be complicated by the fact that Merkel publicly supported Sarkozy's reelection bid.

But the German leader is also aware that opposition to her insistence on austerity as the answer to Europe's economic and financial ills is building across the region.

In Greece, the epicenter of the debt crisis, voters on Sunday abandoned mainstream parties who had agreed to unpopular cuts in return for bailout funds. Spain, Italy and other countries have also seen massive public protests against government austerity plans.

Hollande rode to victory on a wave of anger over austerity measures and a growing sense of inequality in France.

He has pledged to increase taxes on the wealthy by introducing a 75% tax rate on personal earnings that exceed $1.3 million a year, and to fix the salary of heads of state-owned companies to a maximum of 20 times the lowest-paid employee. He has also promised greater regulation of financial institutions and said he would force banks to split off their speculative operations.

One of Hollande's first measures will be to live up to his reputation as "Monsieur Normal" and slash his own salary, and those of his ministers, by 30%, a measure that would put him in stark contrast to Sarkozy, who immediately increased his monthly paycheck upon coming to power.

But in spite of his public dislike of austerity and his calls for more emphasis on promoting growth and employment, Hollande is believed to have assured Germany that he will not be an economic loose cannon within the European Union.

Britain's Guardian newspaper reported that it had obtained a confidential note from the German Embassy in Paris to Merkel's office in Berlin, which said Hollande had reassured the Germans that he would not return to Keynesian tax-and-spend practices.

"Hollande is aware that right at the start of his term in office, he will have to spell out hard truths to the French," the memo said, according to the Guardian. It added that Hollande expects to find France's public finances in a worse situation than Sarkozy led his compatriots to believe.

In a nod to fiscal prudence, Hollande has promised to balance France's books by the end of 2017, a feat that has not happened in 30 years. To that end, he is insistent that the budget deficit target of 3% of gross domestic product for next year must be reached.

Simon Tilford, chief economist for the London-based Center for European Reform, said that any shift in European economic policy, led by Hollande, would probably come in the medium term.

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