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Francois Hollande's Stimulus Alternative

Author: Charles A. Kupchan
May 7, 2012

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Socialist candidate Francois Hollande handily defeated the incumbent president, Nicolas Sarkozy, in yesterday's French election. The Socialists have reclaimed the presidency after a seventeen-year drought, and Sarkozy is the first French incumbent to lose a bid for a second term since 1981.

The signature policy shift likely to be pursued by Hollande will be to balance the European Union's current adherence to economic austerity with efforts to stimulate growth. In pressing Berlin to embrace programs favoring growth and not just belt-tightening, Hollande would likely find plenty of support from other EU members, including Greece, Italy, Spain, Portugal, and other countries struggling with draconian budget cuts. Whether Hollande will also get support in such efforts from German Chancellor Angela Merkel is a big question, with serious ramifications for the EU--and the global economy.

If successful in implementing a program that restores growth while also getting France's fiscal house in order--no easy task--Hollande would be putting both France and the EU on a path that promises to restore economic and political solvency. He would have ample backing from Washington; President Obama has long argued for an EU approach to the financial crisis that focuses on stimulus and not just austerity. Obama might not like Hollande's call for an early French departure from Afghanistan. But the White House would surely welcome some Keynesian pump-priming on the other side of the Atlantic.

In pressing Berlin to embrace programs favoring growth and not just belt-tightening, Hollande would likely find plenty of support from other EU members, including Greece, Italy, Spain, Portugal, and other countries struggling with draconian budget cuts.

The Hollande victory could also produce less auspicious outcomes, though. Hollande's focus on stimulus might exacerbate rather than improve France's fiscal situation, unsettling the markets. France's public spending as a share of output is the highest within the eurozone, and its debt burden is already worrying. If the numbers worsen, the eurozone might face another round of financial crisis. And in light of the size of the French economy, that crisis could be far more disruptive than the one triggered by Greece's debt problems.

A second potential stumbling block is relations between Paris and Berlin. It is of course conceivable that a coalition of Hollande, Mario Monti in Italy, and other pro-growth leaders could succeed in convincing Merkel to revise the fiscal pact or permit the European Central Bank to play a more prominent role in supporting growth.

It is also conceivable, however, that Merkel refuses to budge and that a rift between Paris and Berlin compromises Franco-German cooperation. After all, Sarkozy and Merkel did not see eye-to-eye on how best to manage the eurozone crisis--but Sarkozy generally acquiesced to Merkel's wishes. A tougher stance from Hollande might produce a workable compromise with Merkel. But it could also produce paralysis within the EU as Merkel and Hollande both dig in their heels. That outcome that would put at risk the future of the euro.

The results of yesterday's elections in Greece provide further evidence of the ongoing backlash against austerity. Neither of the two main parties--center-right New Democracy and center-left PASOK--was able to secure a majority. The outcome raises doubts about Greece's ability to adhere to the austerity package needed to be implemented in order to secure further bailout funds. Developments in Greece only intensify the growing pressure for EU policies aimed at stimulating growth, and underscore the fragility of Greece's participation in the eurozone.

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