Monday 7 May 2012

The French punish Sarkozy, vote for the Socialists


There is lots of political news from Europe: a move to the socialists in France; destruction of PASOK in Greece; punishment of the Tories in Britain; huge demonstrations in Moscow; elections in Serbia.

A change of policy by the Socialists 'for growth' is not going to make any difference; there is no more growth, growth is dead.  

French president François Hollande promises 'a new start' for Europe
After victory over Nicolas Sarkozy, Socialist says he will fight back against German-led austerity measures



6 May, 2012

François Hollande has won the presidency of France, turning the tide on a rightwards and xenophobic lurch in European politics and vowing to transform Europe's handling of the economic crisis by fighting back against German-led austerity measures.

The 57-year-old rural MP and self-styled Mr Normal, a moderate social democrat from the centre of the Socialist party, is France's first leftwing president for 17 years. Projections from early counts, released by French television, put him on 51.9% and Nicolas Sarkozy on 48.1%.

His emphatic victory is a boost to the left in a continent that has gradually swung right since the economic crisis broke four years ago.

From the town of Tulle in his rural heartland of Corrèze in southwest France, Hollande declared victory. "May 6 should be a great date for our country, a new start for Europe, a new hope for the world," he said. "I'm sure in a lot of European countries there is relief, hope that at last austerity is no longer inevitable."

He said his mission was to go to European leaders to demand measures for "growth, jobs and prosperity". Hollande's first move as president will be to push Germany to renegotiate Europe's budget discipline pact to include a clause on growth.

Hollande said France had voted for "change", but he had a "heavy" responsibility to drag the country out of economic crisis. Vowing that France would no longer be fractured, divided or riven by discrimination, or those in the poor high-rise suburbs and abandoned rural areas cast aside, he said: "No child of the republic will be abandoned."

Sarkozy, defeated after one term in office, became the 11th European leader to be swept from power since the economic crisis in 2008. He conceded defeat at a gathering of his party activists at the Mutualité in central Paris, urging them from the stage to stop booing Hollande. "I carry all the responsibility for this defeat," he said. He had spoken to Hollande to congratulate him.

"From the bottom of my heart I want France to succeed with the challenges it faces. It is something much greater than us, France. This evening we must think exclusively of France." After 35 years in politics and 10 years at the top of government, he would now become a simple "Frenchman among the French".

The defeat of the most unpopular French president ever to run for re-election was not simply the result of the global financial crisis or eurozone debt turmoil. It was also down to the intense public dislike of the man seen as "President of the Rich" who had swept to victory in 2007 with a huge mandate to change France. Most French people felt he had failed to deliver his promises, and he was criticised for his ostentatious display of wealth, favouring the rich and leaving behind him more than 2.8 million unemployed. Political analysts said anti-Sarkozyism had become a cultural phenomenon in France. The turnout was high, estimated at around 80%.

Hollande is the first Socialist president since Francois Mitterrand's re-election in 1988. Thousands of cheering supporters, including many intellectuals and arts figures, massed at Paris's Place de la Bastille, a flashpoint of the 1789 French revolution, where the left celebrated Mitterrand's first historic victory in 1981.

Hollande's win comes after a brutal and vitriolic campaign marked by support for the far-right Front National's Marine Le Pen, who came third in the first round with 17.9% and 6.4m votes. Sarkozy, who launched his campaign with a marked right-wing slant on the values of work, family and national identity, lurched even further to the right as he courted Le Pen's voters in the past two weeks, stressing the far-right topics of immigration, borders and fear of Islam.

Socialists are hoping Hollande's victory is backed with a sweeping majority for the left in parliamentary elections next month.

Hollande, who has vowed to begin his reforms as soon as he takes office on 15 May, has accepted he will have "no state of grace" leading a country crippled by public debt and in economic crisis, with unemployment nudging a record 10%, a gaping trade deficit, stuttering growth and declining industry. Public debt is so high that interest repayments alone account for the highest state expenditure after education. The rating agency Standard and Poor's this year downgraded France's triple-A credit rating, citing in part that over-high state spending was straining public finances. Both Hollande and Sarkozy had promised to balance the books; France hasn't had a balanced budget for over 30 years.

Hollande's manifesto is based on scrapping Sarkozy's tax breaks for the rich and levying more from high earners to finance what he deems essential spending, including creating 60,000 posts in France's under-performing school system. He has pledged to keep the public deficit capped but for his delicate balancing act to work he needs a swift return to growth in France, despite economists warning of over-optimistic official growth forecasts that need to be trimmed.

Downing Street said David Cameron had called Hollande to congratulate him. Ed Miliband, the Labour leader, said: "This new leadership is sorely needed as Europe seeks to escape from austerity ... He has shown that the centre-left can offer hope and win elections with a vision of a better, more equal and just world."

In parliamentary elections in Greece, governing parties backing the EU-mandated austerity pact were on course for a major drubbing as hard-hit voters defected in droves, according to exit polls.

In a major upset that will not be welcomed by the crisis-plagued country's eurozone partners, the two forces that had agreed to enact unpopular belt-tightening in return for rescue funds appeared headed for a beating, with none being able to form a government.

After nearly 40 years of dominating Greek politics, the centre-right New Democracy and socialist Pasok saw support drop dramatically in favour of parties that had virulently opposed the tough austerity regime dictated by international creditors.

Francois Hollande has ten weeks to avert a French bond crisis
There will be no speculative attack against French bonds on Monday morning because François Hollande has been elected president, the first socialist to take the Élysée since the Mitterrand debacle of 1981


Ambrose Evans-Pritchard
6 May, 2012

The phantom army waiting to pounce is the cynical invention of the Sarkozy campaign. Any fears of a Leftist lurch have been in the price for weeks.
What is true is that the CAC-40 index of French stocks has underperformed Germany’s DAX by 20pc since last August, an ominous divergence for two countries yoked so tightly together. The yield spread of German 10-year Bunds over French OAT bonds has jumped 90 basis points.

This parting of the ways pre-dates the "Hollande scare". It goes beyond downgrade jitters, or fears of contagion from $710bn of French bank exposure to Italy, Spain, Greece, Ireland, and Portugal (IMF data). It reflects a gut feeling in global markets that France is sliding into deep trouble, clinging to a ruinously expensive social model in a Teutonic monetary union and a Chinese trading world.

French economists say the moment of danger will come later this summer - whoever is elected - as the full force of Europe’s contraction crisis hits France.

They absolutely must cut public spending and control the debt,” said Marc Touati from Global Equities in Paris. “It will soon be clear that we are in deep recession. If they don’t act fast, interest rates will shoot up and we will have a catastrophe by September,” he said.

Fiscal tightening a l’outrance across Euroland is a grave policy error, he said, but ‘AA’ France nevertheless has to deal with reality.

The country lacks the credibility to go for growth alone under the constraints of monetary union. It is trapped.

Mr Touati blames the European Central Bank - BCE in French or “Banque Contre L‘Economie” as he calls it - for making matters far worse by needlessly pushing the whole Euro zone system into a slump out of “blind ideology”.

Star fund manager Edouard Carmignac makes much the same critique. His indictment of the pre-Draghi ECB is ferocious, but that does not alter the strategic dilemma for French leaders. Protracted slump makes it all the more imperative for each euro member to put its own house in order.

If Hollande strays too far from virtue, French rates will go through the roof. France will not be able to borrow,” he said.

My own view is slightly different. The German deflation regime is - in the current circumstances - the greater threat to Greco-Latin societies, and to post-War comity in Europe. Sometimes you have to go through a cathartic trauma to break free.

But it is also true that Germany’s own democracy may turn fractious if policy strays too far from German needs and Grundgesetz. This is EMU’s curse. It destabilizes each nation state in turn, each in different ways - a “negative sum game”.

The worst of all worlds would be a nasty spat between Mr Hollande and Chancellor Angela Merkel that poisoned the atmosphere without bringing about any substantive change to Europe‘s “asphyxiation compact”.

Watch the French debt auctions on May 3 and May 16 carefully, says Sophie van Straelen from the French hedge fund consultancy Asterias.

If they go well, a President Hollande may start to think that bond vigilantes will stomach his big state romanticism.

Our belief is that he has no choice. He must increase taxes and cut spending, otherwise markets could panic and we will have a disaster,” she said. The crucial deadline is the budget proposal in July.

Mr Hollande has already hinted at complacency, suggesting that market calm over the last two weeks is a vote of confidence in his policies. It is no such thing.

Paris has a strange atmosphere right now. It is hard to get a table at the bistros of Saint-Germain, yet people have a sense of foreboding.

They know austerity has hardly begun. The press is full of stories that the biggest property bubble ever known in France has begun to deflate. Yet the party goes on. Perhaps this is what it felt like in May 1931, avant le déluge.

Germany took its medicine with the Hartz IV labour reforms eight years ago - under a Social Democrat, nota bene - when the world was humming and EMU competitors were merrily inflating their way into varying degrees of fixed exchange rate Hell.

France will have to take its medicine in less propitious times, somehow clawing back 20pc in unit labour competitiveness against an austere Germany.

It is not easy to see how France can pull this off. Little has been done so far beyond repeal of the infamous 35-hour week. Labour rigidities - employment protection, high tax wedge and minimum wage (SMIC), etc - are among the most entrenched in the OECD club. The unreformed French state takes 55pc of GDP.

The current account has swung from a surplus of 3pc of GDP to a deficit of nearly 2pc in twelve years. France’s share of EMU exports has dropped from 17pc to 13pc. French trade data has become an “event risk”, keenly watched by traders.

Mr Hollande must know the dangers of “socialism in one country” under a currency peg. He was a Mitterrand aide when such an experiment blew up in 1983, leading to the `tournant de la rigueur’ or epic U-turn.

Markets won’t wait so long this time.

Yet he may be prisoner of events if he fails to win an outright majority in the legislative elections in June and has to rely on the fast-rising Front de Gauche -- the neo-Communist movement of Jean-Luc Melenchon with 11pc of the vote.
History buffs will remember the events of 1936 when Leon Blum’s Front Populaire came to power with “New Deal” rhetoric and Communist backing. Investors rushed for the exits, forcing the franc off the Gold Standard. The money crossed the Channel.

Conversations in French became increasingly commonplace in the City of London, as French citizens made arrangements to open sterling bank accounts,” writes Barry Eichengreen in Golden Fetters, my favourite book on the Great Depression.

There are signs that it is happening again, says Louise Cooper from BGC Partners. If Italians were the biggest foreign buyers of top properties in London last year, the French are catching up this year in the £3m to £5m range.

London property is like German Bunds - somewhere safe to park cash,” she said. Is it capital flight? Hard to tell.

Historian Nicolas Baverez said the French are in a natoinal sulk, idealizing a mythical past and retreating behind a new Maginot Line. Europe has become the great scapegoat.

I am convinced that France will stand at the centre of the next Euro zone crisis,” he says.

Luckily for Mr Hollande, global markets have not yet reached their merciless verdict..

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