French Elections Potentially More Momentous Then Greek Vote

Currency in Crisis

There is much talk today about a Greek election in the wake of the parliament approval of the latest austerity measures and PSI. There is concern that the election will result in ascension of Samaras, the head of the New Democracy Party, as prime minister.

Samaras has been quite critical of the various austerity measures, even though he supported the government in the most recent vote and enforced party discipline by removing from the party rolls those parliamentary members in his party who failed to support the new austerity.

The European finance ministers still are requiring that Greek political leaders pledge to honor the agreement even after the election. Previously Samaras has been reluctant to sign such pledges, not necessarily because he plans on reneging but because of the national and personal humiliation.

Samaras is pushing for an early date for elections, which seems possible in April. France also holds elections in April and these elections could have farther reaching implications that the Greek elections and although there is not much focus on them in the US, European investors are already contemplating the implications.

French President Sarkozy has not formally declared his candidacy. There is no doubt that this is a tactical issue and that perhaps as soon as next week he could make the formal declaration. In the mean time, with the European debt crisis and heads of state summits, he is looking very presidential and using his office as what Americans call the "bully pulpit".

Polls suggest that in the first round of balloting in late April, Sarkozy is trailing his Socialist challenger Hollande 31%-24.5%. Marina Le Pen's candidacy appears sufficiently strong to deny either candidate a majority in the first round.

The austerity Sarkozy has delivered, much more than he had previously supported, the weak economy, which is believed to be contracting now, and rising unemployment, his support in the polls has flagged. This has led some observers to fear that Le Pen's votes won't necessarily go to Sarkozy in the second round, but might simply stay at home.

There are two things that appear to be scaring investors about the prospects of a Hollande victory: what he is saying and the implications for the Paris-Bonn axis.

Essentially, Hollande has declared his intention to renegotiate the fiscal compact that was just agreed upon. His opposition to more austerity in France is predicated on much more optimistic growth projections. For the record, the Bloomberg survey of economists shows a median forecast for French GDP this year at zero.

Previously there had been some speculation that Merkel would campaign for Sarkozy, but this seems impractical and counter-productive. Nevertheless, a Hollande victory would upset the close working relationship that Merkel and Sarkozy have established.

The financial crisis has torn asunder any illusion that France is Germany's equal. Note that France was not invited to the meeting of triple-A countries in Berlin (even though France is really a split rating and many private sector investors give it the benefit of the doubt). France still pays about 100 bp more to borrow for 10-years than Germany compared with around 20 bp as recently as two years ago. The cost to insure French sovereign debt for 5-years is more than twice the cost to insure German debt. Almost on any macro-economic measure, Germany leaves France in the dust.

Sarkozy was quick to embrace Italy's Monti to help check Merkel's austerity agenda. The rise of Monti's star appears to be partly a function of the decline of Sarkozy's fortunes.

While it is far too early to rule Sarkozy out, it may also be too early to suspect the worst of Hollande. There is much political posturing presently. In the end, Hollande is likely to be well within the pro-Europe French Socialist tradition like Mitterrand. In any event, the French presidential election is April should be on your radar screen.