The French presidential election may
prove a significant turning point in how France, and thus the rest of
the Euro-zone's 17 governments which use the common currency, address
their continuing economic crisis. The French economy has slipped
back into recession after two consecutive quarters of negative growth
in Gross's Domestic Product (GDP). Socialist candidate and France's
next president, Francois Hollande, campaigned against the high
unemployment rate(10.1%) and public anger over the Euro-zone wide
policy of “austerity” which requires significant cuts in
government spending to reduce sovereign debt. The logic of such cuts
is to maintain or increase the confidence of bond markets to
facilitate the financing of future government borrowing at reasonable
interest rates, as well as too reduce the risk of inflation.
However, the chorus of economists who support abandoning austerity in
favor of stimulus i.e. government spending, even while increasing
government debt, is growing louder. Public opinion is on their side
as unemployment continues to rise and government benefits continue to
decrease.
The French election will have a ripple
effect throughout the Euro-zone and the wider 27 member European
Union. Hollande has promised to discard the austerity program and
increase government spending. He has also promised to renegotiate
the Euro-zone's recently adopted agreement to reduce government
deficit levels to 3.5% and maintain them at, or below, that level
permanently. This program was lead by Germany, who has the only
significant European economy not mired in crisis level debt. The
debt/recession conundrum is currently being debated in the U.S. and
could feel the impact of the November federal elections if either
party were to gain control of both houses of Congress and the White
House. If not, the current legislative grid lock will surely
continue.
The fundamental problem is that cutting
government spending takes money out of the economy, which in times
of recession or just slow growth, goes against conventional Keynesian
wisdom, and central bank history, because it contributes to declines
in consumer spending and thus job creation and ultimately economic
growth. However, the enormous government debt which profligate
spending has created in several of the Euro-zone countries (Greece,
France, Spain, Portugal, Ireland) demands attention before it reaches
a “point of no return” where interest on the debt increases as
confidence in each nation's ability to guarantee payment decreases,
and demands for even higher interest rates based on risk assessments
by investors create a spiral of cascading debt and possible
insolvency. Such a scenario in the relatively small economy of
Greece already threatens the Euro as a viable currency throughout the
zone. The failure of the debt burdened Greek economy at the same
time as an abandonment of French efforts to deal with it's own Euro
denominated debt, and an attempt to restructure Euro-zone agreements
for fiscal responsibility, would threaten the very continued
existence of the Euro as a common currency.
The choices for dealing with both sides
of the coin are limited. Attempts to deal with the multinational
Euro-zone debt crisis have centered around austerity measures
combined with “bailouts” of short term debt by loans from the
European Central Bank, the International Monetary Fund (IMF) and
contributions by the few healthier economies to an emergency fund.
Germany, which has the largest and healthiest European economy, with
cooperation from France, has led the effort. But the German people
are tiring of bailing out lesser, mismanaged economies, and German
Chancellor Angela Merkel has been insistent that bailouts be
accompanied by harsh spending cuts in recipient countries.
Paul Krugman, an American Nobel prize
winning economist turned liberal political writer, has been arguing
for at least two years for the abandonment of efforts by Republicans
to make large cuts in federal deficits and debt through spending
cuts. He has advocated another “stimulus” and is supported by
former Clinton Administration Secretary of Labor and University of
California, Berkeley professor and liberal columnist, Robert Reich,
as well as most of the public policy activists in the Democrat
Party. It will take a long time for any change in French economic
policy to produce results, good or bad, but it is also unlikely that
the fiscal policy gridlock occurring in the U.S. Congress will change
in the short term, so French policy changes and their related
fall-out in the Euro-zone could bolster the arguments of either
Democrats or Republicans in 2013 after the November elections.
Of course the debt/spending cut debate
has a significantly different character in the U.S. if nothing else
because of the enormous size of the U.S. economy and the size of the
federal debt which exceeds U.S. GDP. While the U.S. central bank
(Federal Reserve) had manipulated interest rates to historic lows,
they have run out of room and further cuts are not possible. There
are indications that some nations in the global trading system are
changing from use of U.S. dollars exclusively for the payment of
international debts which could diminish the role of the dollar as
the major international reserve currency. While this is not likely
to be a wholesale trend, it could decrease international demand for
dollars, reduce foreign governments' dollar reserves and thus their
need for U.S. government bonds as a “storehouse” investment.
Efforts to cut U.S. debt thus become even more important before
refinancing that debt runs into demand problems which would in turn
create a need for higher yields which would stimulate the debt spiral
described above.
Currently the U.S. economy is growing
slowly and unemployment is very slowly decreasing but remains high
at 8.1%, based on those workers still looking for employment (over
14% when dropouts are included). Thus, while the urge to speed up
growth through spending remains important, especially in political
terms for President Obama's reelection efforts, efforts to deal with
federal debt seem to be more important in the long term.
Still, the problems of Europe, and the
new wild card of a change in the French executive, will continue to
be a factor in the U.S. recovery. A failure of the Euro system or
even a return to recession in several more of the larger economies
would have a significant negative effect on the U.S. economy. Thus
U.S. markets will be on “France watch” after this elections.
As an interesting aside, the
differences between French and even British political culture are on
display with the candidacy of Socialist Party leader Francois
Hollande. There is a subtle irony that this new president who will
have so much influence in the European Union and possibly the U.S.
economy for the next five years, would not even be a viable
presidential candidate in either Great Britain or the U.S. He is not
the most left wing candidate in France which has a Radical Left Party
and a Communist Party but he has tapped into the social unrest of the
electorate with a class warfare, anti-free market and anti-corporate
rhetoric much like Obama has attempted to do with his “Buffett
rule”, and frequent attacks on “millionaires and billionaires”
and corporations not “paying their fair share” of taxes. But
while Republican nominee to be, Mitt Romney, attempts to court the
social conservatives who remain unenthusiastic about his commitment
to their cause, and President Obama seeks to balance his support for
the political Left while convincing more moderate Independents that
he does not reside in the far Left ideological fever swamps populated
by the likes of Katrina vanden Heuvel (“The Nation”); Nancy
Pelosi, Barbara Boxer and the Daily Kos, the new French President
has not even had to address the fact that he has fathered four
children out of wedlock and has for several years lived with his new
female “partner”. This is not a big deal in France where the
press, unlike the media headhunters in the U.S., is discouraged from
reporting on the personal lives of politicians, and obviously voters
don't care. The difference is made even more emphatic by the fact
that the mother of his four children, with whom he no longer has a
relationship, Segolene Royal, was herself the 2007 Socialist Party
nominee for the French presidency. She was defeated by current
French President Nicholas Sarkozy, but not because of her unusual ,
by American standards, domestic circumstances. Of course, those
circumstances, on the part of either her or Hollande, do not say
anything about their qualifications to govern, but it does emphasize
the cultural gulf that separates U.S. and French society which may
help explain why a candidate in France can be successful with a far
Left secular, populist appeal while in the U.S. even liberal
candidates must meet a minimum standard of religiosity and avoid
personal peccadilloes i.e. John Edwards.
In any case, no matter who is elected
the next U.S. president, the next president of France may well have a
serious impact on the U.S. economy.
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