Hollandes victory prompts fears that the eurozones fiscal compact is in danger
Austerity is no longer destiny. Those are the words with which Frances new Socialist president,Francois Hollande,greeted his nation. Europe and the world have been watching him warily,knowing that the eurozones future is poised on the France-Germany tandem,and Hollandes economic orientation could undermine the Merkozy pact for structural reform and fiscal tightening. It doesnt help that in his campaign,Hollande declared finance his greatest adversary. His promises include creating 60,000 teaching jobs,raising the minimum wage and imposing a 75 per cent tax on the highest earners. He has vowed to go to Berlin and renegotiate the deal,and shift the emphasis to economic growth instead.
Of course,the Merkozy pact is not the only responsible way forward. It has been argued that instead of a single standard of punishing austerity across the eurozone,there could be differentiated levels of fiscal tightening in various national economies: more in Greece,less in the Netherlands,for example. There is also a case for balancing structural reform with a boost to demand. However,the worry is that Hollandes antipathy for austerity is not a genuine stress on growth,but a push towards public sector bloat,in service of some unsustainable Gallic ideal of the good life. France cannot afford that situation,with its soaring debt,undercapitalised banks and unemployment.
The upside is that whatever Hollandes instincts,he is hemmed in by circumstances he simply cannot repudiate the fiscal compact,even if he wants to recast it. Germany will continue to lead this dance,and investors will keep a hawk-eye on Frances credit-worthiness. Hollandes test is only beginning and we should judge him by what he does,not what he says.