France's Elections: The Stakes in Paris and Beyond

7 MINS READApr 20, 2012 | 12:51 GMT
French President Nicolas Sarkozy delivers a campaign speech in Paris on April 15

The first round of France's 2012 presidential election — the only major election in Western Europe this year and the outcome of which could affect the entire Continent — will begin April 22. Polls indicate that Socialist Party candidate Francois Hollande and incumbent President Nicolas Sarkozy likely will compete in the second round, scheduled for May 6, because neither candidate will secure the majority needed to win the presidency in the first round. 

Whoever wins will have to steer France through numerous political and economic crises and, more important, questions regarding France's identity in relation to Germany and Europe. The election outcome will not determine France's course but rather the time frame for an eventual dispute with Germany. That factor will be the most significant for the future of the European Union, as it will determine the status of Europe's core alliance between France and Germany.

The decline of two major traditional sources of French strength is at the root of France's current problems. Historically, the potency of France's internal economy gave the country an advantage over its neighbors, allowing it to remain relatively isolated from regional and global economic shocks. Similarly, the French banking sector traditionally has helped stabilize regional and global lending operations that are crucial to global trade.

However, France's continual postponement of meaningful structural reforms, along with its ossified labor protection laws and welfare benefits, has sapped the country's worker and industrial competitiveness. Measured in terms of unit labor costs, French competitiveness has deteriorated over the past decade (while Germany has stabilized its unit labor costs) and contributed to an increase in its trade deficit. In 2000, France had a trade surplus of roughly 1 percent of gross domestic product (GDP). But since 2005, France has accumulated a trade deficit of $90 billion, or 4.2 percent of GDP. The trade deficit in goods increased particularly in relation to Germany, from $7 billion in 2001 to $35 billion in 2011. French losses were especially significant in the manufacturing sector, where output has contracted by 5.4 percent since 2000.

Furthermore, France has a large public sector, which in combination with a decrease in competitiveness weighs heavily on public finances and leads to higher debt. The public sector accounts for around 56 percent of GDP — compared to the 43 percent average of Organization for Economic Cooperation and Development members — and around 30 percent of national employment, compared to the EU average of 23 percent.

The significant exposure of French banks to the troubled economies of peripheral European countries has tied the fate of France's financial sector to the eurozone's. Of all the banks in core eurozone countries, France's are the most exposed to the periphery, owed roughly $617 billion ($200 billion more than German banks) by Greece, Ireland, Portugal, Spain and Italy. France therefore must remain committed to strengthening crisis containment measures and making bailouts available to the periphery. This commitment requires the continued benevolence of the largest financial relief guarantor in Europe: Germany.

Germany, Austerity and the French Election

The Franco-German alliance has been the impetus for the past 20 years of EU development, especially within the eurozone. The creation of a monetary union was, among other things, supposed to harness the economic strength of a reunified Germany and the strong political will of France. Berlin would gain a powerful driver of growth, and Paris would keep a measure of control over its historically troublesome neighbor. However, after 20 years of the German economy outperforming France, this relationship is out of balance. Paris' political power is no longer commensurate with Berlin's economic strength.

This shift will be at the core of France's election. Sarkozy has developed an efficient working rapport with German Chancellor Angela Merkel, spearheading the EU fiscal integration process in 2011. Hollande, meanwhile, has overtly opposed the pair's push for austerity measures, even though the primary condition Germany set for continued financial containment around Europe's troubled economies was a strong commitment to financial austerity. Hollande has threatened to walk away from Europe's recently signed fiscal compact treaty if growth-spurring measures are not included.

However, as in any election, the increasingly close race between the center-right Sarkozy and the socialist Hollande has polarized some of the populace, and campaign promises are mostly rhetorical. France will not walk away from the fiscal compact treaty because Paris needs bailout mechanisms to insulate it from the periphery. There is also the issue of the Tobin tax, a levy on financial transactions for which both candidates have expressed support, but this tax probably will not be implemented EU-wide. France's next president will have to decide whether to follow through with the tax — a popular electoral promise — at the risk of reducing French banks' market share and potentially causing a further decline in domestic lending activity.

Both presidential candidates also have announced plans to balance France's budget over the next four to five years. Although France has managed to decrease its budget deficit from 7.1 percent of GDP in 2010 to a projected 4.7 percent in 2013, additional corrections during a period of weak economic growth will be difficult for the next government to manage. France's reliance on domestic demand isolates the country from outside turbulence somewhat but also makes it harder to reduce debt levels without affecting domestic consumption. In the past, France has only managed to decrease public debt during periods of economic growth such as the late 1990s and the "golden" years preceding the current financial crisis.

The EU Paradox

The dichotomy in the two candidates' positions regarding austerity measures highlights the paradox the next French government will face. Reining in the budgets of troubled economies receiving financial assistance is a logical move for the provider of such assistance, especially if that provider has a healthy and dynamic economy. However, France's economy does not match Germany's, and this economic gap will grow unless the next French president can commit to significant, long-term social and economic structural reforms.

The wide-ranging welfare and labor law reforms needed to implement economic austerity packages are painful for all countries. However, they are perceived especially negatively in France, a champion of social welfare. A 2010 attempt to reform the French pension system, a mainstay of the country's social welfare net, prompted one of the largest demonstrations in Western Europe since the start of the financial crisis. This opposition will make it harder for France to regain competitiveness and budgetary health in the near future.

In the last quarter of 2011, France's growth — 1.3 percent of GDP — was only slightly weaker than Germany's growth of 1.5 percent. But this year, the French economy is expected to stagnate at 0.8 percent growth while Germany expects continued growth of almost 1.5 percent. If the disparity between the French and German economies continues to grow, the next French president will have fewer incentives to adhere to austerity measures that stifle France's already stagnant growth rates. The only option Paris will have will be to push for the amendment of core austerity-enforcing EU treaties to include significant growth provisions and looser monetary policies for at-risk economies (including France itself). This likely would prompt a strong pushback from other core EU countries, particularly Germany, where the popular fear of inflation resulting from such changes matches France's distaste for labor and welfare reforms.  

France needs Germany to continue strengthening and funding the European Union in order to minimize the risk associated with French fiscal exposure to the periphery and to underwrite the European Central Bank's credibility. However, France's economy cannot afford the increasing austerity measures Berlin wants in exchange for its commitment to European economic integrity. The hardest and most crucial task for France's next president will be balancing these opposing dynamics.

The Changing Franco-German Relationship

Regardless of who wins the election, Paris eventually will find itself at odds with Berlin's policies. The French election will simply determine the time frame for the confrontation. Sarkozy, having developed a close working relationship with Merkel, is more likely to pursue longer-term cooperation with Germany, while Hollande has hinted at taking more immediate and drastic action to oppose Berlin. The longer France continues to support German austerity efforts, the more enmeshed Berlin will become in the new EU architecture introduced by the fiscal compact and the "six pack" of economic policies. However, extending such cooperation means the French economy will suffer under austerity measures longer. Conversely, the sooner Paris declares its opposition to German policies, the sooner it will be able to attempt an economic recovery.

The consequences of this choice will not be limited to France. The Franco-German partnership is the driving force behind the new, tighter EU architecture, which is ultimately better equipped to face the financial crisis and Europe's diminishing relevance on the global scene. The next French president will have the difficult mission of preserving this partnership while ensuring that Paris does not succumb to its current economic and existential woes.

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