Election 2012: Europe Takes Note As Socialist Elected President of France

Socialist candidate François Hollande was elected president of France yesterday (6 May) after defeating centre-right incumbent Nicolas Sarkozy in a second-round run-off. According to the French Interior Ministry, Hollande took 51.62% of the vote to Sarkozy's 48.38%, with turnout at 80.34%. The result was met with delirium by Hollande supporters, many of whom gathered to celebrate at the Bastille in Paris, the site of the prison that was stormed during the revolution in 1789. The final result was closer than some polls had predicted, and sees a Socialist occupy the Elysée Palace for the first time since François Mitterrand in 1995. Sarkozy always faced an uphill struggle to win a second term. Not only had he presided over a severe recession, with high unemployment and spiralling debt levels, he also had to contend with some of the lowest personal approval ratings of any first-term president in the history of the Fifth Republic. Given this, it is testament to his campaigning skill that he managed to close the gap shown in initial polling to less than four percentage points.

Greater Focus on Growth?

The election was watched closely by other EU leaders. In his campaign, Hollande made much of his plans to implement measures to stimulate growth, both at home in France and at the EU level. This had included a promise to renegotiate the recently signed "Fiscal Compact", which aims to enshrine fiscal conservatism into the constitution or legal equivalents of every signatory state to include more flexibility and growth measures, alongside austerity. Although this now seems unlikely, Hollande's victory is a boost to fellow EU leaders seeking a less narrow focus on austerity alone to tackle the Eurozone's debt problems. As a victory for Hollande became increasingly likely in recent weeks, other European leaders began to voice support for measures to help stimulate job creation and growth across the continent. Hollande himself has called for greater funds to be provided to the European Investment Bank (EIB); the redeployment of unused EU cohesion funds; the establishment of EU project bonds to back infrastructure investments; and the introduction of a tax on financial transactions. This should be viewed as the opening salvo in negotiations over additional growth measures to be held with European leaders—most notably German chancellor Angela Merkel—over the coming weeks and months.

Domestically, Hollande has pledged to create 60,000 new jobs in education and 150,000 new job opportunities for the young, and to reduce the retirement age for some workers back down to 60. At the same time, he has pledged to balance the budget by 2017 and make EUR100 billion (USD130.3 billion) from savings, half of which would be through higher taxes—predominantly on the rich and large businesses—and half through reduced spending (see France: 27 January 2012: Election 2012: French Presidential Favourite Unveils Campaign Manifesto). The right was particularly scathing of Hollande's plans on the economy during the campaign, labelling him a reckless "tax-and-spend" left-wing politician who risked destroying international confidence in French finances. Although relatively clear on the taxes he would raise, Hollande will have to spell out more clearly how he will cut spending and balance the budget by 2017 if he is to retain the trust of the markets.

Looking Ahead to Legislative Election

A parliamentary election will follow the presidential election, on 10 and 17 June. This will influence Hollande's actions over the next month as he seeks to reassure markets over his government and at the same time attempts to boost his party's chances of gaining an outright majority in the legislative election. This could prove a difficult balancing act, as movement on his more populist policies risks riling markets. Although the Socialists are likely to emerge as the largest block in parliament, they could well have to rely on a far-left group and/or the greens for an absolute majority. This could have a significant impact on the government's policy options. Hollande must also appoint a cabinet in the next few days. He has pledged to appoint an equal number of men and women, and his choice of prime minister will be of particular interest, providing clues as to the political direction his government will take within the socialist party.

Outlook and Implications

Renegotiation of the Fiscal Compact looks unlikely. EU leaders expended considerable political capital to agree the compact in the first place, two countries have already ratified the document, and Merkel will be extremely reluctant to reopen the treaty and risk a raft of amendments. Much more likely is a separate document or "growth pact" including some measures advocated by Hollande intended to boost growth and jobs. These could include an increase in EIB lending capacity and a reallocation of unused EU cohesion funds. The establishment of EU-backed project bonds or the introduction of an EU financial transaction tax, however, remains very unlikely. Germany is extremely reluctant to take any step towards the mutualisation of debt in the Eurozone, while many countries are uneasy with the proposed taxation of financial transactions (see Europe: 14 March 2012: EU Finance Ministers Lukewarm on Financial Transaction Tax).

Despite media speculation, the Franco-German axis that lies at the heart of EU co-operation is unlikely to suffer unduly with Hollande as president. Both are ultimately pro-European and pragmatic politicians, and recognise that they have nothing to gain from imperilling the future of the Eurozone through drawn-out public spats and disagreements. Negotiations will be held, but compromises remain likely on the key issues. It should also be noted that Hollande is far from renouncing austerity. Indeed, his budget plans include eliminating the deficit by 2017, much of which is to come from reduced spending. Instead, he is calling for growth measures to run alongside austerity.

Initial market reaction to Hollande's election was muted, with investors appearing more concerned by events in Greece than the widely forecast Socialist victory in France. Nonetheless, Hollande will have to tread carefully in the coming weeks if he is to maintain a level of market confidence. He will have to present a more detailed and credible deficit-reduction plan, including details of his spending cuts, if he is to keep French borrowing costs under control.