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Europe Prepares for Leadership Change

At the beginning of France’s election season, German Chancellor Angela Merkel took the unprecedented step of crossing country lines to campaign for Nicolas Sarkozy, and showed little desire for a relationship with Socialist challenger François Hollande. But with Hollande now leading in the polls ahead of this weekend’s election, Merkel is changing her tune: In the event of a Hollande victory, she has called for a meeting within one day of the inauguration to discuss a strategy for tackling Europe’s ongoing fiscal woes.

Despite their ideological differences, Merkel will get her meeting, and some sort of joint approach will likely be fudged up. Neither France nor Germany wants a crisis, and both sides will be committed to finding a solution regardless of any personal distaste for each other they may have.

As the FT reports, this will not come without a cost to Merkel, who has insisted that the current fiscal pact not be renegotiated and remains committed to a strict policy of austerity for Europe. Hollande, for his part, has promised growth measures and a renegotiated fiscal pact. If the meeting does take place, he will get some of what he wants, and some growth plans will be found to garnish Europe’s austerity campaign. (Adding to the European Investment Bank would be one likely move.)

It’s still hard to predict how all this would play out. If all Hollande wants is to make it look like he has added a growth (read: spending) dimension to EU policy, then agreement with Merkel will be easy — and may actually strengthen the European consensus. Plenty of leaders are chafing at the German-imposed austerity plans; a nice soothing spoonful of sugar could help the medicine go down.

If Hollande wants a real change in direction, however, things could go much less smoothly, and markets are likely to become hysterical if there are signs that France and Germany are unable to agree. Worst case, France itself could become engulfed in the firestorm as investors flee French debt.

Sarkozy is gaining in the polls and conceivably could pull out a win, but all over the Continent, European leaders are preparing for change. How much change we will get remains to be seen, but unless Hollande is clever and cautious, the early weeks of his presidency could be tumultuous ones.

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  • Kenny

    1. France is the weak country with a weak hand to play. The future is slipping away from the French much faster than they realize.

    2. Why do you continually use an euphemism like ‘growth measures’ when what is actually afoot with Hollande’s plan is 1) massive deficit government spending and 2) inflation?

    Call a spade a spade, Mr. Mead. In that way, your communication will be a lot clearer, not to mention a heck of a lot more honest.

  • Jacksonian Libertarian

    “If all Hollande wants is to make it look like he has added a growth (read: spending) dimension to EU policy, then agreement with Merkel will be easy — and may actually strengthen the European consensus.”

    Spending doesn’t lead to Growth that leftist politicians are allowed to get away with this lie, is a shame on journalists everywhere. In fact Government borrowing reduces the capital available to consumers and businesses by reducing supply which drives up the price of capital to reduce demand (the Law of Supply and Demand). This actually shrinks the economy by shrinking consumer and business economic activity. Leftist economists and politicians will tell you that the government needs to borrow and spend in order to make up for reduced demand by consumers and businesses during a recession. But, this is putting the cart before the horse, as demand is subject to the amount of supply, and government borrowing reduces that supply.

    When Hollande takes control and spends and borrows more, what happens to the French economy will be the exact opposite of growth. I expect European capital to accelerate its departure from the EU. This will be good for the US as much of the capital will come here, and help offset the $1.3+ Trillion a year in borrowing our own government is doing. Investors everywhere recognize that only in the US is there a growing political resolve (the TEA Party) to deal with government debt, borrowing, and spending.

    To those who ask what about Germany? I say Germany is intimately connected to the European economy, and it is going to suffer major dislocations to its exports and deficits from an intransigent France and the PIIGS. And while Germany has reduced its deficit it is about to incur new expenses with new bailouts, and reduced economic activity which will drive it back up and accelerate borrowing.

  • Cunctator

    If Merkel were serious about solving Europe’s problems, she would have given Hollande more time to prepare before meeting with him.

    If Hollande was serious about the meeting, he would demanded a delay.

    The meeting will just be a photo op, nothing more. And the Euro-crisis will continue to grind away.

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