So Sarkozy is out, and socialist Francois Hollande will take over in a few days as the next President of France.Hollande’s victory is causing a lot of brow furrowing due to the fact that he’s anti-austerity, not eager to reform the pension system, and favours higher taxes on the rich.
In short: He seems like a standard-issue European socialist.
So people seem tthink that Hollande is living in some fantasy world, where he’ll be able to conjure cash out of thin air, and ignore the bond market’s demands for cuts.
This is the wrong way to think about it, and people shouldn’t be so alarmed.
The fact of the matter is that there’s no example in Europe, yet, where the bond market has rewarded austerity.
Take Spain: It recently announced fairly severe reform plans, and yields just shot higher. So there’s really no reason to care much about French domestic policy at this point.
What matters in the Eurozone is Eurozone politics and ECB policy. So for example, what has worked (to some extent) have been the ECB’s 3-year LTROs, which have certainly calmed the banking system down. And what might work is a move towards greater establishment of transfers, fiscal union, and Eurobonds. And on that stuff, Hollande is on the right side.
So forget his domestic policies. They’re not at the heart of the matter, and there’s no reason to think that his course will make a huge difference one way or another.
Just focus on Hollande as a force to break up the “Merkozy” establishment, and perhaps take Europe away from the current destructure policies which have exacerbated the debt crisis, while also further pushing countries deeper into recession.
Watch more about the impact of the new French leadership on Europe: