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While we slept Saturday night there was a slight change of government…in France.
Francois Hollande, a self-described socialist and “enemy” of Euro-austerity, defeated current French President Nicolas Sarkozy…
So it’s a blast from past for France—they’ve just elected the first socialist president in 17 years.
And the impact of that change is being felt throughout the Eurozone right now…
Eurozone stock markets plunged on the news to 4 ½ month lows.
How did this happen?
First of all, Mr. Hollande came to power because he is not Nicolas Sarkozy...
That’s a big advantage right there.
Playing Tonto to Chancellor Merkel’s Austerity Lone Ranger on the Eurozone austerity tour did him no favors at home...Some may even say Sarkozy was actually Trigger (the horse).
In any case, when push comes to shove in Paris, the French prefer—at least for now--to ignore reality…
Reality is a tough sell
Hollande’s solution is to treat the symptoms, not the disease…
Who knows? Maybe it will go away.
And the truth is, reality is a tough sell right now; especially when someone else promises relief.
Mr. Sarkozy shouldn’t feel too bad, though; he’s the eighth Eurozone leader to be voted out—or simply “removed” from office--in just over a year.
So what does this election result mean for France, Europe, and the Eurozone?
More of what got them where they are today—more debt, more public jobs.
Mr. Hollande is not only an active socialist…but he is anti-austerity.
He sees the austerity policy as not working because people aren’t working.
And he’s right, of course. Unemployment is rising quickly in the Eurozone, and in France.
Austerity has meant cutting jobs—civil service jobs to be exact--that can no longer be paid for with borrowed money.
It has also meant cutting wages of those who still have a civil service job…
AND cutting or delaying pension payments.
All of this has led to shrinkage in wages, in prices, and in demand.
Recession, unemployment, sovereign default, and civil unrest are now spreading throughout the Eurozone and France.
That’s reality that Sarkozy had to deal with, and reality is not popular.
Just ask Sarkozy.
But now that all of that mess will soon be Mr. Hollande’s problem; how will he handle it?
Hang the rich
He will do so in the same way that the Mr. Obama–the first socialist in the White House in the US and since Hillary Clinton—has, by “spreading the wealth around” as it were…
By raising taxes up to a 75% rate on the rich…
Because Mr. Hollande, in his own words, “does not like the rich.”
This will not only drive wealth out of the country, but also wealth producers.
And while he’s taxing the rich and driving them away, Mr. Hollande will also raise government-level spending to expand the civil service…
To bring back the civil service jobs that no one in Europe can afford…except maybe the Germans.
This trick of deficit-funded government jobs does not add wealth to an economy, just the illusion of jobs and of course, more debt.
We have seen that here in the US the past several years…
But hey, at least it feels good to say you’ll put people to work no matter how much it costs.
If all of this is true, then France’s new president will buck the austerity trend that has been imposed upon countries like Greece, Italy, Spain, and others by Germany and France.
Euro Crisis to get worse
This is a big problem for Germany…
They are hated enough as it is in places like Greece and Italy…They do not want to be seen as the task master to a cratering Europe.
Germany is already feeling alone and Mr. Hollande hasn’t even been sworn in yet.
But everyone in Europe—including the banks--can read the graffiti on the Metro…
The age of the Berlin-Paris Austerity Axis is over. And that means a lot will change, and not for the better…
With Mr. Hollande’s ascension, there is no real expectation that the Euro Crisis will improve…
Austerity in Europe is not politically possible without France…
Witness the riots from Athens to Madrid, from Rome to Paris…
This is not just political wind-bagging…
European banks are stuffing even more of their money into central banks to shelter it from the crisis that they think will get worse before it gets better.
That means a downward spiral of tighter credit, a contracting money supply and a shrinking economy…with inflation, just to make the wounds salty.
But riskier assets, like commodities and stocks, will see losses…
How much they fall may depend on how much President Hollande delivers on his campaign promises…
France’s election will have several implications for the US economy, too.
For one, the US dollar will be stronger against the euro…and we may also see a rally in US Treasuries.
For a while, at least.
Because Eurozone recession will eventually cost the US jobs, too.
The new regime in Paris will seek a “new” way out of the crisis without the pain of austerity, but a Franco-German split on Eurozone economic austerity may well mean that chaos in Europe may not be far behind.
The fact is, Mr. Hollande’s ideas are like “hope and change” for France. They are ideas based on wishes, not realities…and the markets know it.
And those are…The Gorrie Details.