French Presidential Election: Coup De Grâce For The Euro?

Amidst a flood of proposals, plans, and rumors to save the euro and the Eurozone, much has been made of the Merkozy couple, the uneasy partnership between French President Nicolas Sarkozy and German Chancellor Angela Merkel. During his speech today in Toulon, an ancient Mediterranean port town, Sarkozy reemphasized his commitments: the ECB must remain independent, and France and Germany must remain the pillar of stability. “To defend the euro is to defend Europe,” he said. Alas, he may be out of a job by May 2012—and his potential successors to the left and to the right have different ideas.

France isn’t doing well. Unemployment, which has been rising since May, breached 9%. Wages haven’t kept up with inflation, and purchasing power has dropped. Industrial orders plummeted. Layoffs have been announced. Yields are rising. Banks are teetering. Sarkozy had tried to reform the French welfare and tax system. Result: rising income disparity, tax loopholes for the rich, diminished pension benefits for the middle class, reduced subsidies for the poor, etc., and now ugly unemployment trends.

Voters are angry. And the poll numbers that came out today show to what extent (L’Express, article in French). During the first round on April 22, François Hollande of the Socialist Party would obtain 29.5%, Sarkozy 26%, and right-wing populist Marine Le Pen 19.5%. And this after Sarkozy got a 6-point bump from an anti-nuclear imbroglio on the left that Hollande had trouble squelching. In a runoff during the second round on May 6, Hollande would win by a landslide 56% against Sarkozy’s 44%.

If the economy deteriorates further, Marine Le Pen, president of the National Front, might beat Sarkozy in the first round. Media savvy and endowed with a captivating presence, she’d stunned the French political establishment by beating Sarkozy in the polls earlier this year.

“Let the euro die a natural death,” she said in August. And she often speaks out against the rules of the European Union. Should she become president, though unlikely, she’d pull France out of the Eurozone.

François Hollande is more temperate. In trying to appeal to the center while satisfying his diverse constituency on the left, he criticizes Sarkozy but avoids a direct confrontation with Merkel. “It’s Mme Merkel who decides and Mr. Sarkozy who follows,” he said Wednesday (Le Monde, article in French), an observation that found wide resonance. His camp has come up with a five-point plan:

  1. Expand to the greatest extend possible the European bailout fund (EFSF)
  2. Issue Eurobonds and spread national liabilities across all Eurozone countries
  3. Get the ECB to play an “active role,” i.e. buy Eurozone sovereign debt.
  4. Institute a financial transaction tax
  5. Launch growth initiatives instead of austerity measures.

In his diplomatic manner, he threw down the gauntlet: points 2, 3, and 5 hit a wall of resistance in Germany, which might rather exit the Eurozone than subject itself to them.

But he claims that the five measures would be a better solution to the debt crisis than the new European treaty that Merkel and Sarkozy are concocting for the European summit on December 8 and 9. The treaty’s budgetary stability rules would impose strict limits on budget deficits and debt levels. If those are violated, sanctions kick in. If violations are repeated, the European Court of Justice becomes the final arbiter of national budgets.

Which Hollande considers an abdication of sovereignty. Instead, he wants a remodeled European commission with a president who should be elected by the populations of all member states. So neither national retrenchment of the kind Le Pen advocates nor the austerity politics that Germany insists on and that Sarkozy supports.

Hollande doesn’t operate in a vacuum. To his left is Arnaud Montebourg, who ran against him in the primary and surged out of nowhere to third place, beating a host of Socialist stalwarts. He is likely to become influential in a Hollande government. And he has come out swinging against Merkel.

“Angela Merkel decided to impose the German order on the European Union,” he said (Le Monde, article in French). “She is destroying the Eurozone by imposing on the middle class and on the lower classes the price of the debt that accumulated during the crisis.” He spoke of “German egoism” and “German nationalism” that is “resurging through the policies à la Bismarck of Mme Merkel. She builds confrontation to impose her domination.”

His idea to save the Eurozone: “Allow the ECB to do what all central banks in the world are doing: buying debt. The moment has come to confront Germany politically and to defend our values.”

Which values? After a series of devaluations since 1945, the French franc was “revalued” in 1960 at 100 old francs for 1 new franc. New notes were printed and confidence was restored. However, from 1960 through 1999, when it was replaced by the euro, the franc lost another 88% of its value—due to France’s habit of monetizing its debt. A fate Germany has assiduously avoided.

And about the fabulous economic strengths of Germany? “The only point where one can say that there is a German success, it’s the trade surplus. But it doesn’t do it to China. It’s over our own ruin that Germany makes its fortune.”

Later on Wednesday, he denied that he was Germanophobe: “It’s not Germany I’m accusing, it’s the annexation of the French right by the Prussian right.”

Okay. The division of roles is becoming clear. To avoid irreparable damage, Hollande, who may have to deal with Merkel in five months, sounds tempered but firm. He lets his firebrand Montebourg make certain points in public. But the core of their solution—monetizing sovereign debt without central control over national budgets—is totally unacceptable to Germany. So, if the euro and the Eurozone as we know them are still alive by early May, then the French presidential election may well deliver the coup de grâce.

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