Realpolitik for Hollande

Commentary by CLIVE CROOK


Francois Hollande’s campaign was a throwback to Francois Mitterrand’s failed socialist experiment of the early 1980s. The new French president doesn’t oppose Europe’s fiscal pact because it imposes too much austerity too soon — which is true. He opposes the very idea of structural reform. The French government already spends 56 percent of gross domestic product. Hollande now promises to hire tens of thousands of extra civil servants and roll back his predecessor’s increase in the retirement age from 60 to 62. And he proposes to pay for this expansion of government with higher taxes — including a new top income tax rate of 75 percent.

Capital markets, which already were nervous about France’s prospects, will stamp on any attempt by Hollande to keep his crazy promises. Sooner or later, he’ll be forced to acknowledge reality.

If it’s sooner, some good could come of his election. The European Union needs to replace or at least modify the fiscal pact that binds its member governments to curb public borrowing at once. It also needs an easing of monetary policy and steps toward a closer fiscal union. Germany has set its face against all these measures.

If Hollande tries to disinter the French socialist project, the gruesome results would strengthen the conviction of German Chancellor Angela Merkel that brutal austerity is the only way for the euro area to overcome its problems. But if Hollande can pivot in time to a milder program of coordinated fiscal moderation, high but not punitive taxes and long-term control of public spending — policies not that different from those of his predecessor, Nicolas Sarkozy — Merkel may choose to bend. That’s possible because Sarkozy’s defeat was a defeat for Merkel, too. Governments that yielded to the German formula for recovery-through-austerity have been falling across Europe.

A possible compromise on fiscal policy between Merkel’s officials and Hollande’s team is taking shape. There’s talk of an increase of capital for the European Investment Bank and jointly guaranteed bonds to finance new infrastructure investment. If that happens, Germany will insist it’s not a renegotiation of the fiscal pact but a supplementary agreement. Whatever.

A deal of the sort being discussed would be a move in the right direction. Full fiscal union won’t happen in the foreseeable future, because Germany would have to be willing to subsidize other countries and the other EU states would have to be willing to let Germany dictate their fiscal priorities. That requires large-scale constitutional re-engineering. Europe needs to find a middle way. The EU must combine some degree of mutual fiscal support with a measured surrender of fiscal sovereignty.

Wisely, Hollande’s campaign was more about posture than specifics. The new president has time to rethink his position on longer-term fiscal control and structural reform. If he does that and insists on short-term fiscal moderation — whether this is deemed a renegotiation of the fiscal pact or merely a supplement to it — his election might help Europe.

CLIVE CROOK IS A COLUMNIST FOR BLOOMBERG VIEW IN WASHINGTON. THE OPINIONS EXPRESSED ARE HIS OWN. This email address is being protected from spambots. You need JavaScript enabled to view it.


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