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Thursday, May 03, 2012

Europe awaits the next French President

Sunday will be a big day in EU politics: both the Greeks and the French go to the polls.

Ahead of the French elections, we've published a briefing looking at the possible impact of the election results on Europe. In particular, we note that,
"No matter who wins, France could well become a more difficult and assertive EU partner, though both candidates are likely to struggle to deliver on their various promises to take on Europe, such as re-negotiating the fiscal treaty and tougher border controls. The Franco-German axis will continue, but a Hollande victory in particular will mean a more unpredictable relationship and therefore potentially more uncertainty on the markets. Clearly, under Hollande, Germany will find it far more difficult to push its vision of a eurozone based on strong budget discipline.”
Do check out the full briefing here, and a brief summary here.

Apart from the obvious impact on the Franco-German axis, another thing is worth flagging up. Have a look at the graph below.


The graph illustrates that, beyond the rhetoric, the budget plans of the two candidates do not differ radically with respect to the impact on France’s debt reduction and budget outlook. The graph looks at how much the two candidates’ plans are meant to reduce French debt by – compared to the IMF projections and an adverse scenario estimated by Open Europe. Virtually, the only difference between the two is Hollande’s decision to delay a balanced budget by one year, and his more optimistic growth assumptions. It is not clear why Hollande’s growth expectations are more optimistic, given that the only difference is a slight delay in austerity – something which in turn casts serious doubt as to whether Hollande can actually deliver what he has promised. The IMF predictions highlight that both plans may be slightly optimistic but not impossible. Despite concerns over Hollande’s economic policy and its impact on the euro, if he manages to achieve roughly the debt reduction he sets out in his plan, it would clearly be a positive thing for both France and the euro.

However, as the adverse scenario highlights, any slippages (particularly with regard to the primary surplus) could bring France’s debt sustainability into question and also lead French borrowing cost to increase markedly. This would in turn shake confidence in the entire eurozone – not least since any French downgrade will also effectively reduce the lending capacity of the eurozone’s bailout funds (the EFSF and the ESM). Such slippages could be caused and/or exacerbated by any another crisis in Spain, to which France would be heavily exposed...

3 comments:

christina Speight said...

The graph is crazily optimistic in respect of the 3 primary forecasts. It is as certaigessbuthn as can be in practice that the adverse scenario is going to apply - with spades on! As long as all the eurozone are blinkered by their prejudices and all the hostages to fortune they have built up they won't do what will happen in the end - and catastrophically if they don't snap out of their trance.

The euro cannot possibly work and all the tweaking at a]] the edges merely postpones the day of judgment (and the longer it's postponed the more dire it will be)

The euro as a single currency for 17 incompatible economies must be scrapped - and replaced with one (or two?) for smaller groupings. This would mean appreciation of any northern currency and a devaluation for the weaker bretheren , In that way - and only that way - can prosperity be restored to Europe and a drag on the rest of the world eliminated.

Rik said...

The assumptions used in France especially re growth are totally unrealistic.
We donot know when this dip will end. Imho unlikely soon with Southern PIIGS simply forced in al sorts of cuts one way or another no real structural changes re labormarket etc. Assumptions by the end of this year are just no better than pubtalk and are effectively based on nothing.
So France will never grow 3% it will be lucky if there is no negative growth the next couple of years.

Plans costs money so come on top of current deficit, which is under especially the Hollande plan more likely to go up than down. As current deficit is higher than inflation debt will rise.

A likely bankbail out (or as alternative a Spain/Italy rescue with guarantees via ESM and Co. comes on top of this.

The Hollande assumptions are nowhere near realistic and markets know that and will act to that. It is not unlikely that the first Hollande style measures announced if he is elected will cause some sort of Berlusconi effect (say 1 % higher interest).

christina Speight said...

Nothing CAN improve and nothing will until the euro finishes and individual states resume floating convertible currencies.

It is the only real hope for the destitute an desperate peoples