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Are Investors Prepared for French Election?

The first round of the French election is only days away, and political junkies are getting excited: President Nicolas Sarkozy and Socialist challenger Francois Holland are currently neck-and-neck.

Neck-and-neck represents an improvement for Sarkozy, who recently trailed Hollande by double digits, but his long-term prospects still look rather bleak. Polls show that Hollande is well ahead in the decisive second-round ballot, and in order to make up the difference, Sarkozy will have to walk a narrow political tightrope, winning votes from the far-right National Front as well as supporters of the centrist Francois Bayrou.

If Hollande wins, as many analysts now believe will happen, the impact will spread far beyond France. Europe—and financial investors—have largely closed their eyes to the possibility. Perhaps it’s time for them to open them: as the New York Times notes, a Hollande victory could lead to serious changes in French policy:

[Sarkozy’s] possible defeat carries implications that would radiate far beyond Paris. Mr. Sarkozy has had contentious but valuable relationships with Chancellor Angela Merkel of Germany, a fellow conservative, on European and euro zone issues; with the British on defense issues, including the Libyan war; and with President Obama on issues involving Iran and Israel, NATO and Russia.

A victory by even a centrist Socialist like Mr. Hollande, who has advocated higher taxes on the rich and a greater emphasis on growth over austerity, would create immediate strains with Germany and rattle financial markets that are already nervous about the size of France’s debt. Mr. Hollande has also said that he wants to pull French troops out of Afghanistan sooner than NATO has agreed to do. Still, he says that his first visit abroad would be to Berlin, no matter how chilly the reception.

These are serious issues. France and Germany rarely see eye-to-eye, but cooperation between them is essential in crafting a solution to the European crisis. For all their stylistic differences, Sarkozy and Merkel have a stable working relationship and a strong rapport. From what we’ve seen so far, Hollande is unlikely to share these qualities, which will make European cooperation on the euro more difficult than it is already. On the domestic front, Hollande’s turn away from austerity towards a high-tax, state-run approach is unlikely to mollify those worried about France’s growing debt problem.

Financial investors in France and Europe will not be pleased with either of these developments, and it will be interesting to see whether markets respond as the election nears. There are more risks in Europe than many understand.

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  • Kenny

    Love it.

    For the first time in my life, I rooting for a Leftie.

  • Ulysses S. Rant

    Excellent points, Professor Mead.

    I’ve been telling my friends for some time that the election of “President Hollande” could cause major aftershocks in the European political landscape. Hollande believes that if “Club Med” decides to spend its way to prosperity, then the ECB will have little choice but to back their play and buy their bonds (should private investors be wary of doing so).

    The Germans and their northern brethren will not like this. Not…one…bit. Turbulent days to follow, I suspect…

  • James Brown

    Well, with the markets, you’re [darned] if you do, [darned] if you don’t with them.

  • Hammered at Trinite sur Mer

    Rumor on the street– Hollande victory will lead to DSK’s rehabilitation as Director of Activities at Club Med– Otherwise he’ll be forced to leave the country and look for work with the US Secret Service…

  • James Brown

    oops! sorry for the language! 🙂

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