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Sarkozy Booted by French Voters

Posted by Steve Markowitz on May 7, 2012

This past weekend French president Nicolas Sarkozy was voted out of office and was replaced by Socialist François Hollande.  While Sarkozy is a center-right politician, his replacement by a socialist was not related to political differences.  The French people, like other Europeans, expressed their frustration with the ongoing economic problems of their country and Europe that have not been resolved after nearly four years of significant governmental interventions and efforts.

Hollande’s victory is the next step in the evolving European sovereign debt crisis that began with the worldwide economic meltdown in 2007.  In short, European countries piled on massive debt during the bubble years that they cannot afford to pay back.  Instead of writing off this debt, a requirement for insolvent companies in the private world, European leaders have attempted to create the illusion that the problem is resolvable with less drastic steps.

Within Europe there or two schools for problem resolution of the sovereign debt issues.  The one that dominated European politics since the beginning of the crisis took the position that through austerity the indebted countries could pay their debt back, although with some debt write-downs.  While politicians like Sarkozy pursued policies of austerity, the steps that they took were tentative and could not eliminate the debt, a requirement for renewed growth.  It has become clear that more drastic steps are required.  However, socialism is not the answer.

With the failure of the “austerity” efforts, Europeans are restless.  The French have elected their first Socialist president in 20 years.  Like Sarkozy before him, Hollande has promised voters that he will reduce the government’s huge budget deficit.  Unlike Sarkozy, Hollande has promised to do so by taxing wealthier French, thereby requiring less austerity.  However, any first-year student of economics understands that both austerity and higher taxes are contractive forces that ultimately reduces tax revenues and increases deficits.

Hollande’s election has ramifications that go beyond France’s borders.  Sarkozy had been an ally to German Chancellor Angela Merkel who promoted austerity to resolve European debt issues.  Hollande, on the other hand, wants to renegotiate European treaties.  This will likely place France on a collision course with Germany’s economic policies.  Germany’s experience with hyper inflation makes it unwilling to print money, part of the resolution suggested by politicians who want to end austerity.

When making his victory speech, Hollande said: “We will bring back Europe on a track for jobs, growth and the future.  We’re no longer doomed to austerity.”  While these words might seem reassuring, the United States has proven that governments cannot spend their way out of a recession that has been created by excess debt.

The problem for France, like other European countries, is their lack of competitiveness versus other European countries, specifically Germany.  While France’s trade deficit exceeded $90 billion for 2011, Germany had a trade surplus of over $120 billion.  If it was not for the European currency, the Euro, France’s competitive position versus Germany would have improved with a devaluation of its own currency.  This reality makes President-elect Hollande’s promise to create job growth a red herring.  Germany will not tolerate policies that increase the likelihood of inflation and it will not give France economic advantage at the expense of German citizens.  This creates a growing potential for conflict between France and Germany, the historic norm between the countries.

While the French election garnered most of the news headlines this past weekend, a similarly important event occurred in Greece.  On Sunday, Greece held its election and handed a humiliating defeat to both major political parties.  Neither received enough votes to govern and various fringe parties on the Right and Left gained significant votes.  Like the French, the Greeks are demanding problem resolution.  Unfortunately, I again that is not possible without the Greek debt be written down near zero and the country returning to its own currency.  However, even these required resolutions will inflict serious pain on Greek citizens, a reality that Europeans have not come to grips with.

The United States is not a mutant from fallout of the happenings in Europe.  President Obama and Nicholas Sarkozy had a close working relationship.  President-elect Hollande has already stated that he will fast-track withdrawal of his country’s troops from Afghanistan, i.e. he will place France’s interest first.

The events in Europe are starting to evolve more quickly.  They point to a fracturing of European politics and heighten the possibility of the breakup of the European Union.  While the problems of Europe surfaced with the worldwide economic meltdown, they were actually created by an ill-conceived union created by Progressive bureaucrats who understood little about national interests and economics.  Ultimately these two items will dictate how the politics and economics solutions in Europe play out.  European countries will individually evolve strategies to protect their national interests, with each country being concerned that others will gain advantage if they do not act quickly.  This has created a volatile situation that will quickly lead to a crescendo and lead to real problem resolution.  However, these forces are ultimately beyond the control of politicians.

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