French voters are deluding themselves if they think the man they just elected president offers a viable alternative to the departing Nicolas Sarkozy.
Francois Hollande’s socialist program is inoperable. Let’s hope he understands that. If he doesn’t already, he soon will.
Hollande’s campaign was a throwback to Francois Mitterrand’s failed socialist experiment of the early 1980s. The new president doesn’t oppose Europe’s fiscal pact because it needlessly imposes too much austerity too soon -- which is true. He opposes the very idea of structural reform. In France the government already spends 56 percent of gross domestic product. Hollande now promises, among other things, to hire tens of thousands of extra civil servants and roll back Sarkozy’s increase in the retirement age from 60 to 62.
He can’t think of a public spending program he doesn’t like. His rhetoric is stridently anti-capitalist. And he proposes to pay for this further expansion of government with higher taxes -- including a new top income tax rate of 75 percent.
France isn’t starting from a position of fiscal or financial strength. Capital markets were already nervous about its prospects. They will stamp on any conscientious attempt by Hollande to keep his crazy promises -- and if that happens, the wider crisis in the euro area will flare again. The question isn’t whether the crowds in Paris celebrating the return of good old-fashioned socialism will get what they want -- they won’t. The question is whether Hollande will row back from his campaign pledges quickly enough to avert disaster.
The mood of jubilation among France’s unreconstructed leftists will make it difficult. And Hollande doesn’t have much time. Mitterrand took from 1981 to 1983 to discover that his policies constituted the alternative that Margaret Thatcher had in mind when she said, “There is no alternative.” Hollande may have just days to come to the same revelation. Looming parliamentary elections complicate the tactical judgment. Hollande needs voters to give him the majority in next month’s vote for the legislature. He can’t betray his supporters before then.
Whether it’s sooner or later, Hollande will be forced to acknowledge reality, and the disillusionment of the French left will be terrible.
But if it’s sooner, some good could come of his election. The European Union needs to replace or at least modify the fiscal pact that binds its member governments to curb public borrowing at once. It also needs an easing of monetary policy and steps toward a closer fiscal union, which would lift the threat of insolvency from its distressed sovereign borrowers. Germany has set its face against all these measures.
If Hollande tries to disinter the French socialist project, the gruesome results would strengthen the conviction of German chancellor Angela Merkel that brutal austerity is the only way for the euro area to overcome its problems. The situation would then go from bad to worse, and the stresses on the EU itself would be enormous. But if Hollande can pivot in time to a milder program of coordinated fiscal moderation, high but not punitive taxes, and long-term control of public spending -- policies not that different from his predecessor’s -- Merkel and the Germans may choose to bend.
That’s possible because Sarkozy’s defeat was a defeat for Merkel, too -- her biggest to date. She had allied herself with the outgoing president, at one point even offering to campaign for him. (Sarkozy ultimately declined.) Governments that yielded to the German formula for recovery-through-austerity have been falling all across Europe.
There was another election on Sunday -- in Greece. The two main parties had promised to honor the terms of the country’s bailout agreement with the EU and the International Monetary Fund. Both were routed, and the country was plunged into renewed uncertainty.
This worsening turmoil doesn’t advance German interests. It threatens economic ruin. Merkel’s refusal to bend is building resentment against her country’s dominant role in EU policy making. If Merkel wants to preserve that standing she’ll have to be more pragmatic.
Merkel’s officials have already been in touch with Hollande’s team, and a possible compromise on fiscal policy is taking shape. There’s talk of an increase of capital for the European Investment Bank and jointly guaranteed bonds to finance new infrastructure investment. If that happens, Germany will insist it’s not a renegotiation of the fiscal pact, but a supplementary agreement. The commitment to fiscal control isn’t being softened, Merkel will say, but new measures to spur growth can be adopted alongside. Whatever.
A deal of the sort being discussed wouldn’t go far enough but it would be a move in the right direction. Full fiscal union won’t happen in the foreseeable future, because Germany would have to be willing to explicitly subsidize other countries, and the other EU states would have to be willing to let Germany dictate their fiscal priorities. That requires large-scale constitutional re-engineering. For the moment, it’s out of the question.
But this isn’t an all-or-nothing choice. Europe needs to find a middle way. For the EU to be a going concern, it must combine some degree of mutual fiscal support with a measured surrender of fiscal sovereignty. Joint “project bonds” for infrastructure would be a start.
Wisely, Hollande’s campaign was more about posture than specifics. We know he’s against austerity and for taxing the rich -- but he hasn’t drawn up a budget. That must wait, he says, until auditors have checked the government’s books. This could give the new president cover to rethink his position on longer-term fiscal control and structural reform. If he does that and insists on short-term fiscal moderation, whether this is deemed a renegotiation of the fiscal pact or merely a supplement to it, his election might help Europe.
But Hollande can’t be a good thing without letting his supporters down. That’s a hard truth to contemplate in your first week in office.
(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)
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