Is austerity facing defeat along with Sarkozy?

In what was an historic result a few days ago, incumbent French president Nicolas Sarkozy lost the first round of voting in the presidential election... a first for a French president running for re-election. President Sarkozy placed second to Socialist candidate François Hollande, and the two will face each other in a runoff on May 6. But what would a Socialist victory mean for France, the Eurozone and austerity?

As one half of the dynamic duo that has been selling increasingly unpopular austerity measures to Europe, Nicolas Sarkozy’s potential imminent departure from the Elysee Palace will clearly have ramifications not just for France, but for the broader Eurozone too. No doubt German Chancellor Angela Merkel will be losing sleep over Sarkozy’s possible political demise, with him having been her main ally in debt reduction measures imposed across the Eurozone.

Ahead of the second round of voting, Sarkozy now finds himself in a desperate bid to court votes from the far left, the far right, and the centrists. This is now a two horse race, but other candidates garnered enough support to hold some power ahead of the second vote. In particular, an endorsement from far right National Front party candidate Marine Le Pen would carry some weight. Economic woes have obviously contributed to a rise in her party’s popularity, with the National Front receiving 18% of the vote!

It’s funny, I remember sitting in a Paris hotel room with my father in 2002, as he wrote the Rivkin Report. Out of nowhere, we heard what sounded like an army advancing. We looked out the window and saw what we discovered to be 100,000 French men and women marching up the Rue de Rivoli and along the Champs Elysees, vehemently protesting against far right candidate Jean-Marie Le Pen... Marine’s father! He wound up with roughly 10% of the vote ten years ago, which was seen as a disturbingly strong show of support for the far right. He even found himself in the second round runoff against Jacques Chirac. Well, it seems Europe’s deepening financial troubles have delivered his daughter an even more impressive result, with almost one in five voters turning to her anti-EU, anti-immigration, protectionist policies.

France finds itself in a precarious economic position. Unemployment of 10% and rising, a loss of competitiveness, a huge debt to GDP ratio and a rising current account deficit are just some of the economic problems facing the republic. And with the economy the number one issue with voters, it’s unsurprising that they are taking it out on Sarkozy.  Poor guy, it really was a hospital pass coming to power on the eve of the global financial crisis.

Hollande in contrast promises expansionism and greater spending should he become President. He wants to put an end to the imposition of austerity throughout Europe, and has threatened not to ratify a debt-reduction accord endorsed by Chancellor Merkel. This has sent shivers of concern throughout much of Europe. Public spending is already at 56% of GDP, the highest in the Eurozone, and so any increase in this level is naturally viewed as reckless by fiscal conservatives.

So how does all of this affect the Eurozone? Well, it certainly adds instability to an already unstable environment. The sovereign debt crisis in Europe has been dictating global markets’ movements for some time now, overshadowing US and Chinese economic data. And global markets sold off yet again last night on the back of continued European financial and political instability. The Dutch government resigned after failing in its bid to reach an agreement on reducing the budget to meet European guidelines. Greece is an utter mess. And it now appears that Spain is in recession, with yet another quarter of negative growth. Is it any wonder that incumbents are finding it difficult to hold on to government!

A Socialist win in France on May 6 will likely create some trading opportunities in the market. There will undoubtedly be some ramifications for certain sectors and specific securities, and so we’re currently examining such opportunities.

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