Next change...

For the first time in 17 years, a member of the socialist party, François Hollande will hold the key position at Elysée, after beating Nicolas Sarkozy in the recent French Presidential election. An uphill task of resurrecting the French economy, reviving growth and above all safeguarding the euro, awaits Hollande as he is all set to take charge of France. The biggest challenge for him would be to draw consensus among 27 EU members to bring in a change in the European Central Bank's mandate. However, this would be difficult as it is expected to face stiff opposition from Germany. For the uninitiated, German Chancellor Angela Merkel was furious when Hollande, during his election campaign in December last year, announced that he will renegotiate the Fiscal Compact Treaty. However, the landscape in recent times has changed considerably and a strong negative sentiment against austerity has been developed in EU as it is evident from the recent election results in Greece. Moreover, in Germany itself, the method of austerity to counter the crisis is fast becoming unpopular and in a recent regional poll, Merkel's party Christian Democratic Union (Germany) suffered a crushing defeat for being stringent on austerity. Hollande is expected to garner support from pro-growth leaders in Italy and Spain as well. These recent developments might just work in his favour.

 

The signatory policy shift, with Hollande coming to power, would be to balance the European Union's current adherence to economic austerity along with providing stimuli to revive growth and to convince Merkel to embrace the same rather than focusing on belt-tightening and navel gazing policies.

 

Interestingly, if Hollande succeeds in implementing a programme that restores growth while getting France’s escalating debt in order, he would in all probability bail the EU out of the severe debt crisis by putting both France and the EU on a path that promises to revive economic and political solvency. Moreover, he would also get backing from American President Obama who have long called for an EU approach that would focus on growth stimulus and not mere austerity. 

 

However, if things go wrong, Hollande’s excessive focus on stimulus might further exacerbate France’s fiscal condition, which is already feeling the pressure of excessive debt burden. As a matter of fact, France’s public spending as a share of output is highest in the Eurozone. Given the sheer size of the French economy, if the condition deteriorates further, we might face another round of global economic crisis.

 

On the diplomatic front, working hand in hand with Merkel would be crucial for Hollande. His tougher stance could potentially deteriorate the relation between Paris and Berlin, which would endanger the survival of the euro and the European Union. Winning the Elysée was probably the easiest part of job for Hollande; the real task lies ahead!