President Nicolas Sarkozy’s announcement this week that he would seek re-election was hardly a political thunderclap. It is nonetheless significant: The campaign, which could result in a transfer of power in Europe’s second-largest economy, will inevitably introduce another element of uncertainty into the continent’s struggles to resolve the sovereign-debt crisis.
As the tumultuous negotiations over the fate of Greece demonstrate, the debt meltdown continues to threaten the survival of the single currency, and with it the stability of the global economy. Riding out the storm -- and maintaining the united front that Sarkozy has forged with German Chancellor Angela Merkel -- should be the priority for whomever occupies the Elysee Palace this spring.
Yet Francois Hollande, the Socialist front-runner in the polls, has made clear that he plans to take a different approach than Sarkozy to Europe and the Franco-German push for austerity. He has said he will demand a review of last month’s European Union agreement, designed by Merkel and Sarkozy, to tighten rules on deficits and debt. This posturing, even if Hollande doesn’t ultimately follow through on it, could feed a simmering anger in populations across Europe over the painful steps needed to restore growth and fiscal stability.
In addition, both Sarkozy and Hollande have played to the crowd by suggesting that outside forces may be to blame for the economic turmoil. Sarkozy plans to introduce a 0.1 percent levy on equities and other financial products in August, even if other European nations don’t follow suit. As we have said before, this proposal, known as the Tobin tax after its creator, the U.S. economist James Tobin, is misguided. At worst, it would have disastrous consequences by curbing growth and, at best, it would distract from the heavy lifting that needs to be done.
For his part, Hollande went off course in his first major campaign speech last month by designating “big finance” as his “greatest adversary.”
Such populism is all the more unfortunate because both candidates have otherwise correctly made deficit reduction the centerpiece of their campaigns. The urgency of such measures was emphasized last week by the national auditor, the Cour des Comptes, which said the next president will have to step up efforts to reduce budget and trade deficits or risk an “uncontrollable” debt spiral. Adding to the pressure, Standard & Poor’s stripped France of its AAA credit rating for the first time on Jan. 13, and this week, Moody’s Investors Service said it may downgrade France’s top Aaa rating.
The concern is justified: Government spending is the world’s highest at about 56 percent of gross domestic product, compared with 47 percent in Germany, and Sarkozy has estimated that last year outlays exceeded revenue by about 5.4 percent.
In any case, public debt of 1.69 trillion euros ($2.22 trillion), or 85 percent of GDP, offers little room for expansionary policies. To meet the Sarkozy government’s target of cutting the total budget deficit to 3 percent of GDP in 2013 and eliminating it by 2016, France must reduce the shortfall by 1.4 percentage points next year and 0.9 percentage point in each of the following three years, according to the auditor. And despite a forecast-beating report Feb. 15 that the economy grew 0.2 percent in the fourth quarter, the risk of recession remains, with jobless claims jumping by 5.6 percent last year to a 12-year high of 2.87 million.
Hollande, too, vows to narrow the deficit to 3 percent of GDP in 2013, from about 7 percent now, and promises a balanced budget by 2017. In addition, he has proposed increased spending on education and social programs, which he would pay for by raising tax rates on investment revenue and high incomes. Sarkozy’s plan relies on a blend of tax increases and reductions in labor costs to boost competitiveness.
In the remaining nine weeks of the campaign, both candidates will undoubtedly feel compelled to tell voters more of what they believe they want to hear. For Hollande, that could mean tacking to the left with further criticism of the Franco-German firewall, and rejecting the need for budget cuts or an overhaul of France’s generous welfare state. (He has already promised to review Sarkozy’s decision to raise the retirement age from 60 to 62, still one of the world’s lowest.) Sarkozy, who will probably face a challenge from the far-right National Front candidate Marine Le Pen, will be strongly tempted to co-opt her supporters by adopting some of her anti-immigrant, anti-globalization message.
None of the above would help France address the weaknesses in its economy, most urgently the need to narrow a trade deficit that reached a record 69.6 billion euros last year, equivalent to about 3.5 percent of GDP. That will only be achieved by increasing competitiveness and reducing the debt load, which in France, as elsewhere, has become a dangerous drag on growth.
The two mainstream candidates should stay focused on making this case for bitter medicine to the French people. The turmoil now gripping Greece provides a vivid illustration of the dangers of complacency.
Read more opinion online from Bloomberg View.
To contact the Bloomberg View editorial board: firstname.lastname@example.org.