The Economy

Main Economic Fallout of Europe Votes: Greece, Not France

The French election result matters less than the Greek vote. The only option for Greece might be to negotiate an exit from the euro. Will a fresh e...
Andrew SawersMay 9, 2012

France’s election of François Hollande as its next president will have less of an impact than might have been expected from the media debate in the run-up to the vote, economists believe.

Before last weekend, media political commentators were expecting pro-austerity incumbent Nicholas Sarkozy to lose to pro-growth Socialist Party challenger François Hollande. They also maintained that it would be an upset for the “Merkozy” policy that aligned France’s leader with German chancellor Angela Merkel.

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Now that the results are in with a 52% to 48% win for Hollande, there could be less change on the horizon than had been expected by some. Ben Jones, an economist covering euro zone issues for the London-based Economist Intelligence Unit, told CFO European Briefing: “France and Germany should be able to paper over their differences much as they have been doing under Sarkozy. I don’t think the shift to the left in France changes things too much.”

The balance between the center-right and center-left “hinges on spending and tax,” Jones said. “Hollande’s program relies a little more on tax. Growth will be weaker, so revenues might not be coming in at quite the pace they expect.”

He added that Hollande, who up until now has largely been addressing a domestic audience rather than his European partners, will soon face a tough choice: “Does he disappoint his voters and make good on the deficit target? Or does he do what he’s said he’s going to do, in which case he risks a loss of confidence in French debt? After the parliamentary elections in June, I think he’s going to be more wary of the bond markets than he is of the voters.” 

In some quarters, the run-up to the French election dominated more media time than the election in Greece. The result in Athens is now, however, commanding the spotlight because two-thirds of the voters rejected the austerity measures, preferring political parties from the far right and far left.

Economist Nouriel Roubini of Roubini Global Economics comments on Twitter that the result of the Greek election is “much more serious than the French one as the former leads to chaos while Hollande will turn out to be a moderate.” Not only is Greece’s continuing membership in the European Union now “at risk,” Roubini says, a “negotiated exit” is the only option to restore growth in that country.

Moreover, he adds, a review of the country’s fiscal program by the International Monetary Fund will have to be postponed: “Otherwise [the] IMF would have to pull the plug on Greece right away,” he says. The European Union and the IMF bailed out Greece with a package worth 130 billion euros ($170 billion) in February.

With no government, and looking ungovernable at present, fresh elections in Greece in June seem likely, said Jones. The problem is that the messages and the choices for the electorate will be the same as they were last weekend. At best, another election offers “a second chance to come up with the right answer,” Jones said. “This next election looks like a referendum on Greece’s continued membership in the EU.”

While Roubini believes that Greece’s exit from the euro is all but inevitable, Jones argued that “the cost of allowing Greece to leave . . . [is] sufficiently high to persuade the creditors to keep the show on the road.” He says that there is enough incentive for the remaining countries to pay for Greece to stay in because if Greece does leave, the cost of keeping in other troubled economies escalates.

“If you show that [an exit] can happen, then exit risk becomes very real for the other countries. Their spreads go up, and therefore it just becomes more expensive to keep them in.”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.