On the other end of the political spectrum, Sarkozy failed to win the support of those who vote for radical right wing candidate Marine Le Pen, despite a conscious effort by Sarkozy to embrace Le Pen’s anti-immigration and pro-law-and-order views. Le Pen is the daughter of the notorious anti-Semite Jean-Marie Le Pen, who rocked European politics when he qualified for the second round in the 2002 French presidential election. French polls also indicate that most of Le Pen’s supporters, who made up 18% of all voters in Sunday’s election, would rather stay home rather than vote for Sarkozy in the May 6 runoff.
In the 2007 French presidential election, Sarkozy win over many supporters from the far-right, enabling him to win both the first round, and the runoff of the election as well. That was because at that time, many right wing Le Pen supporters saw Sarkozy as an ally. However, as the French president Sarkozy’s policies have alienated much of the French right wing, which is why in this election they rallied around Le Pen instead.
LE PEN’S DAUGHTER MOBILIZES THE FAR RIGHT
Unlike her controversial father, Marine Le Pen has not engaged in race bating and anti-Semitic rhetoric. She was therefore able to attract a substantial protest vote in the first round, made up of French citizens who have become disillusioned with their conventional political leaders.
In a speech to her supporters in Paris on Sunday, night, after the election results showed her unexpectedly strong 3rd place finish, she declared, “Tonight is historic. We are the only opposition to the ultra-liberal libertarian left wing.” As her aging father looked on across the room with obvious pride, he told reporters that “this is the start of a long road to a future victory. Marine is the only one offering a path of change.”
Her conservative supporters noted that she ran a respectable, disciplined campaign with no racial overtones which focused on the need to protect France’s economy and the dangers to it from France’s membership in the European Union. Le Pen also conspicuously refused to endorse Sarkozy in his runoff against Hollande. Apparently she intends to establish herself and her conservative movement as an independent force in the future of French national politics, and her strong showing in Sunday’s election may be enough to accomplish that.
On the other hand, the strong showing by Le Pen was a source of anger and embarrassment for the leaders of the French left, who accuse supporters of her far right party to be dangerous racists like her father.
But one of Le Pen’s supporters rejected the criticism from the left, saying, “people need to stop calling us fascists, Nazis and racists. It’s ridiculous. I like everyone, no matter what the color of their skin is.”
WHY THE WORLD’S EYES ARE ON FRANCE
This French election is being closely watched in the US and in financial markets around the world because of the key role which Sarkozy has played in formulating the euro zone’s response to the European sovereign debt crisis over the past two years. Ever since the crisis started with the threat of Greece defaulting on its bonds, Sarkozy, has worked closely with German Chancellor Angela Merkel to come up with a formula for bailouts and other ways to prevent the catastrophic collapse of the market for bonds issued by weak European nations like Greece, Portugal, Spain and Italy. Because many of Europe’s largest banks have made major investments in those bonds, a default could send many of them into bankruptcy, triggering a new worldwide financial crisis very much like the one which hit large US banks in 2008.
European markets reacted to news that Sarkozy had come in second in Sunday’s French election with a sharp drop in stock prices, however the value of the euro quickly stabilized.
WHY MERKEL AND SARKOZY DOMINATED EU ECONOMIC POLICY
Merkel and Sarkozy played a dominant role in fashioning the response to the crisis because their countries have the strongest economies in Europe. Germany is stronger economically than France, but the combined resources of both are needed to manage the debt burden for all of the smaller euro economies now in danger of default.
Merkel, on behalf of German taxpayers, has taken the lead role, insisting that European governments seeking bailouts subject their spending to far stricter budget discipline in return for vital injections of cash from the European Central Bank, (ECB) as well as an emergency, continent-wide bailout fund.
Sarkozy’s consistent support for Merkel’s austerity demands has led many to refer to their joint economic policy as “Merkozy,” which is a clever combination of their two last names.
While the Merkozy policy formula did prevent a widely feared European economic meltdown last year, it has become very unpopular throughout the rest of Europe because it has depressed continent-wide economic growth. The required government spending cuts as well as the tax hikes, reductions in welfare benefits and public sector wages, have all reduced economic activity across Europe. These policies have also generated intense political opposition, as workers and government benefit recipients realize how much they have lowered their standard of living. Yet, Merkel, Sarkozy and Europe’s central bankers have been afraid to relax the austerity measures before the European sovereign debt crisis has been fully put to rest.
ITALY AND SPAIN STILL A PROBLEM
Unfortunately, Europe is not there yet. Even though its economy is, in many ways, much stronger than it was a year ago, real dangers still remain. After months of relative calm in the bond markets, Spanish and Italian sovereign debt is once again under pressure. Investors fear that the combined size of the next European bailouts may far exceed the capacity of the emergency funds now available. The increased risk of a euro zone sovereign debt default is reflected by the rising interest rates being demanded by investors to buy the Spanish and Italian bonds which must be sold in order for those countries to roll over their maturing financial obligations and avoid default without a bailout.
The ECB has already stepped in to help Italy and Spain sell their bonds, and received in return solemn promises from the leaders of those countries to make fresh budget cuts and institute long overdue labor market reforms. If those promises are broken, faith in the sovereign debt issued by those countries will be further undermined in financial markets.
The greatest fear is that the available European bailout funds will be insufficient to prevent an uncontrolled default of Spanish or Italian bonds, with disastrous effects to the entire European banking system. Unlike the large US banks, which were forcefully re-capitalized by taxpayer TARP money, many of Europe’s banks are considered vulnerable to such default, which would force them to write off the value of tens of billions of dollars in those bonds which they are now holding on their books as assets.
Those banks got a boost in liquidity last year when the ECB gave them all long term loans of large amounts of cash at low interest rates. But that would still not be enough to keep them afloat if all of their Spanish or Italian bonds are suddenly declared to be worthless.
UNDERSTANDING THE FEAR OF CONTAGION
Furthermore, if some of the big European banks fail, other institutions around the world which do business with them, including many of the largest American banks, might suddenly be in trouble, too. The big banks would stop lending to one another because nobody could be sure which of them was holding more worthless sovereign debt bonds than it could afford. In this case, merely the fear that the other banks with which they do business were affected would be enough to shut down the financial system. Panic would seize the international markets. Business and investment credit would instantly dry up.
We would see a repeat of the financial meltdown which followed the Lehman Brothers collapse in September, 2008. Only this time, there would not be the equivalent of the US Treasury and Federal Reserve to throw enough money at the problem to fix it.
EURO ZONE’S ACHILLES HEEL
The ECB does not have the same kind of authority as the Federal Reserve, and the euro zone does not have the equivalent of a single Treasury Secretary. Instead, all of the leaders of the euro zone countries, and in many cases their parliaments as well, would have to sign off on a bailout of this magnitude before it could be implemented.
This is the Achilles heel of the euro zone financial system. It lacks a unified governing authority and cannot react quickly to the kind of economic “contagion” threat which the default of a major European economy would instantly create.
Europe’s leaders had great trouble handling the potential default of a relatively small economy like Greece because they still have no way to prevent massive deficit spending by the leaders of any euro zone country. It was not until this past December that euro zone countries adopted in principle a mechanism that could force them to rein in their deficits, and even that measure has not yet been finalized.
SIGNS OF US CONCERN
This is why there is still real concern over the possibility of an Italian or Spanish sovereign debt default, even in the US. Over the weekend, US Treasury Secretary Tim Geithner cautioned leaders of the International Monetary Fund meeting in Washington that the current global economic recovery “remains fragile, with continued risks from the euro area and higher oil prices.” He added that, “the success of the next phase of the crisis response will hinge on Europe’s willingness and ability, together with the European Central Bank, to apply its tools and processes creatively, flexibly and aggressively to support countries as they implement reforms and stay ahead of markets.”
This is why the French election is so important. The European bailouts of the past two years would not have been possible without the close cooperation of Merkel and Sarkozy, who eventually forced all the other European leaders to go along.
But Sarkozy’s challenger, Hollande, is a Socialist. He has expressed strong opposition to some of the more painful “Merkozy” austerity measures imposed over the past two years. If Hollande replaces Sarkozy as French president in May, some of those euro zone measures already put in place could start to unravel. This would also make it that much harder for Europe to deal effectively with a fresh threat of an Italian or Spanish default, and the danger that the crisis would spread to the US financial system as well.
PRIMARY WAS A REFERENDUM ON SARKOZY
However, inside France, these worries were only a secondary consideration for voters in Sunday’s primary. French voters saw the election as more of a referendum on Sarkozy’s domestic economic policies during his first term in office than in the context of the problems facing the worldwide financial system. The voters were more concerned about the broken economic promises which Sarkozy had made to them when he ran for his first term of office in 2007 than the problems of the euro zone since.
In this respect, Hollande’s deliberately bland personality and “normal” political approach, in sharp contrast to the flamboyant Sarkozy, worked to his benefit. It encouraged French voters to make up their minds based primarily upon their disappointment with Sarkozy’s record during his first term in office.
Hollande has also been careful not to allow his Socialist background to alarm the French business and financial community. While making the usual Socialist promises to increase taxes on corporations and euro millionaires, Hollande has promised to cut the French budget deficit while stimulating the lagging French economy, which has been Sarkozy’s biggest single political weak spot.
Sarkozy campaigned in 2007 on promises re-energize the French economy by reducing the size and influence of its public sector and cutting the unemployment rate in half to 5%. But when the global financial crisis struck a year later, Sarkozy abandoned those policies, relying upon massive deficit spending to support French banks and automakers and to preserve the generous French system of social welfare benefits.
Much like President Obama, Sarkozy claims that his economic policies succeeded in avoiding a complete collapse of the French economy. Yet French voters were still disappointed that unemployment is stuck at a 13-year-high of near 10%. They did not buy Sarkozy’s arguments that the French economy, despite its problems, is still much better off than those of Greece, Ireland and Portugal, which had to seek international bailouts.
Instead, on Sunday, French voters judged Sarkozy’s first term by his failure to keep his initial campaign promises to them seven years ago, and by that measure, clearly judged him to have been a failure.
HOLLANDE KNOWS THAT HE IS BEING WATCHED
Meanwhile, Hollande is very much aware that his candidacy is being watched closely throughout Europe and financial centers around the world for signals of a shift in Europe’s response to the sovereign debt crisis.
“This is an election that will weigh on the future of Europe. That’s why many people are watching us. They’re wondering not so much what the winner’s name will be, but especially what policies will follow. My responsibility, and I know that I am being watched beyond our borders, is to reorient Europe on the path of growth and job creation,” Hollande told local supporters as he cast his vote Sunday in his home town of Tulle, capital of the CorrÃ¨ze district in south-central France.
HOLLANDE SEPARATING HIS ECONOMIC POLICIES
While separating himself from the harsh austerity of the “Merkozy” policies, Hollande has been deliberately vague. In a telling statement, Hollande declared, “My real adversary has no name, no face, no party; it will never be a candidate, even though it governs. It is the world of finance.”
If elected president, he promises to maintain budgetary responsibility, but without saying precisely where he will make spending cuts in his own budget. He promises to impose a 75 per cent income tax on all incomes over 1 million euros, bring the official retirement age back down to 60 after Sarkozy raised it to 62, and to stimulate nationwide growth through new infrastructure spending. With respect to foreign policy, Hollande promises that if elected, he will bring the remaining 3,600 French troops in Afghanistan home before the end of this year.
With regard to key euro zone policies, Hollande says that he will urge the European Central Bank to drop its objections to issuing bonds backed by the faith and credit of the entire European Union. He also wants the ECB to undertake the equivalent of the US Federal Reserve’s quantitative easing program for government securities to stimulate the French and European-wide economy.
Hollande also says that he is opposed to the measure adopted in December which would require all euro zone countries to limit their budget deficits to 3% or face serious punitive action. Instead, Hollande wants France and the other euro zone countries to maintain their full power over their own budgets instead of turning it over to a central European authority. This is a key point, which will have major economic ramifications. On one hand, loosening fiscal restraints on European government spending would enable the European economy to recover from its current slowdown much more quickly. However, the withdrawal of that fiscal discipline would further undermine investor confidence in the ability of the euro zone economies to repay and refinance their sovereign debt.
POLITICAL UNREST ACROSS EUROPE
The growing discontent throughout Europe with the policies of fiscal restraint is undeniable. If Sarkozy fails to win re-election, he would become the 11th leader of a euro zone country to lose power since the start of the sovereign debt crisis.
Sarkozy’s Sunday defeat marks the first time an incumbent president running for a second term has failed to win the first round since the current form of government was established with the founding of the Fifth French Republic in 1958. If Hollande goes on, as expected, to defeat Sarkozy in the May 6 runoff, he would become France’s first left-wing president since Francois Mitterrand completed two seven-year terms in 1995.
Hollande comes from Tulle, a small town of 16,000 in south central France. He truly acts as a man of the people, who can be found on a typical weekend morning having a simple breakfast and coffee at his favorite table at a local restaurant, where anybody can sit down and talk to him.
“He is very well liked around here because he’s so normal, so approachable,” the restaurant owner said. “We’ll be sorry not to see him. It would be nice to think he would still come in for a coffee, but perhaps not as president. I wouldn’t want to have to clear the place.”
It was there that Hollande got his start in French politics. In 1988, he defeated former French Prime Minister Jacques Chirac for local office. Hollande then quickly rose in the Socialist Party ranks, serving as the national party leader from 1997 to 2008, but since he was a Socialist, he has never served as a minister in a French government.
A NEW DUTCH DEBT CRISIS
The growing political rebellion across Europe against the austerity policies of Sarkozy and Merkel claimed another victim over the weekend with the collapse of the Dutch government in a dispute over the budget cuts required by the euro zone. Dutch Prime Minister Mark Rutte submitted his government’s resignation to Queen Beatrix on Monday. He said that early elections were an “obvious” outcome of the impasse with Geert Wilders, the leader of the Freedom Party, who refused to agree to 16 billion euros worth of cuts in the budget to meet the 3% deficit limit specified by the December euro zone agreement pushed by Sarkozy and Merkel.
Rutte will continue to lead a caretaker government until a new coalition can be formed, but a new election in the Netherlands will probably not take place until after the summer. Even then, we still may not have a clear political winner.
The latest opinion polls show that the Netherlands remains politically fragmented, and that Rutte’s Liberal Party is likely to have difficulty forming a new government coalition, even though it will probably win the most seats in the parliamentary election.
Rutte and his Finance Minister, Jan Kees de Jager, had been among the harshest critics of euro zone countries like Greece and Portugal, and supported calls from Merkel and Sarkozy for tough austerity measures.
Now the shoe is on the other foot. Because of the overall slowdown in Europe, the Dutch economy has been performing poorly and is expected to shrink this year, making it one of the worst performing in the euro zone.
In addition, the Netherlands has been warned by the Fitch organization that it may lose its AAA bond rating as early as June, raising its costs for borrowing money. Currently, Germany, Finland, Luxembourg and the Netherlands are the only euro zone countries maintaining a AAA bond rating.
SPREADING BAILOUT FATIGUE
Like most of the rest of Europe, the latest polls show that even the frugal Dutch people are now opposed to the deep budget cuts demanded by the Merkozy austerity policies. Like German voters, the Dutch are now suffering from “bailout fatigue” and are growing increasingly resentful of the high cost of rescuing other euro zone countries from their reckless deficit spending.
Opportunistic politicians across Europe, like Wilders and Marine Le Pen, have sensed the changing mood. After the budget talks broke down in the Netherlands, Wilders issued a defiant statement declaring that, “the Freedom Party benches are unanimously against Brussels diktats and the attack on our elderly.” Brussels is the home of the European Union.
Like Le Pen, Wilders also wants the Netherlands to abandon the euro and return to its old currency, the Dutch guilder. He also is against immigration not only of Muslims but also of Poles and other central and eastern European members of the EU.
VOTERS DISGUSTED WITH ALL POLITICIANS
“Voters from different parties share the same view – disgust or disappointment over the political action and the political parties,” said Dutch pollster Maurice De Hond, noting that two thirds of those asked agreed with the statement: “I’m tired of all the party politics.”
The same sentiment was widely voiced over the weekend by French voters as well.
“Everyone is voting, but no one is excited,” said HervÃ© Thiery, who sells trinkets on the Avenue de Flandre in Paris’ working-class 19th Arrondissement.
John Hustaix, a student, said he had voted reluctantly for Sarkozy, out of concern that a Hollande victory might create turmoil in the financial markets. “Nobody knows exactly what’s going to happen whoever is elected,” he said.
This lack of enthusiasm over both mainstream candidates helps to explain why Marine Le Pen and her right wing party may be the biggest winners from Sunday’s election. French voters, and voters throughout Europe have grown tired of their political leaders and particularly their inability to solve the euro zone’s economic problems.
SARKOZY’S LAST HOPE
Even Sarkozy, known as the indefatigable campaigner, has begun apologizing for his past mistakes, promising to “use all the energy I have,” over the next two weeks to challenge his deliberately colorless opponent while seeking the right wing support which he lacked on Sunday.
But it may already be too late. Sarkozy was far more successful abroad in establishing himself as a leader capable of tacking a broad range of emergencies, from the global financial meltdown, to the sovereign-debt crisis to the war in Libya, than he has been at home.
By contrast, Hollande is offering French voters, and all of Europe, a relatively modest liberal economic approach to help jump starting their economies while promising to try to heal the rifts within France and Europe as a whole which he has ascribed to Sarkozy’s “divisive” style.
Heading into the May 6 runoff, Sarkozy is clearly facing an uphill battle in which his main obstacle is not his low-key opponent, but rather the high expectations which he created in many French voters which he was never able to fulfill.
The Associated Press contributed to this story.