The French Wildcard: Francois Hollande

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by: James A. Kostohryz

Socialist Francois Hollande is surging ahead of incumbent Nicolas Sarkozy in recent polls measuring voting intentions for the French presidential election. For example, for the first round of the elections to be held on April 22, the LH2-Yahoo poll and the Ifop polls have Hollande ahead by a margin of 30.5%-23%.0 and 29%-25.5%, respectively. Most importantly, for the second and decisive round to be held on May 5th, Holland's lead has increased and now stands at 58%-42% and 57%-43% respectively, according to the aforementioned polls.

Hollande is pulling ahead in the presidential polls based on two very popular campaign pledges. The first is to tax all French citizens with yearly earnings of more than 1 million euros at a rate of 75%.

Hollande's second very popular campaign pledge is to demand renegotiation of the "fiscal union" treaty that was just agreed to by eurozone heads of state and which is set to go through a ratification process in the parliaments of member states (in some cases to be put to a national referendum). Specifically, Hollande wants to jettison various "austerity" provisions and add "growth" or "stimulus" provisions based on increased fiscal expenditure.

To make matters worse, Hollande actively opposes various key structural reforms considered crucial to revive EU competitiveness, such as raising pension retirement ages (indeed he proposes to lower them) and an overhauling of labor codes.

At the current historical juncture, Hollande's position regarding eurozone economic policy is radical, indeed. As such, the prospect of a Hollande victory in France threatens to unravel the tenuous multilateral European consensus that has enabled massive bailouts of countries that were otherwise headed toward chaotic default such as Greece, Portugal, Ireland, Spain and Italy.

Germany will not tolerate renegotiation of the fiscal union treaty. Aside from its philosophical commitment to austerity (one that is very popular with German voters), the current German government believes that any incoming French government should honor the national commitments of any prior government.

Indeed, Der Spiegle magazine will be reporting on Monday that the current German administration is so miffed by Hollande's repudiationist rhetoric that they have organized a "pact" amongst the conservative-led governments of Germany, Britain, Italy and Spain to refuse to meet Hollande for the duration of the French presidential campaign.

For his part, Hollande has stated that he resents this effort and has indicated that France will not be bullied by other EU states. Hollande insists that regardless of the position of other EU governments, the right of France to demand renegotiation of the treaty is a sovereign prerogative. According to Hollande, France can do with the fiscal union treaty as it pleases and there is nothing that other states can do to interfere with this sovereign French decision.


The prospect of a Hollande presidency in France introduces an element of profound uncertainty in European affairs. There are several ways to interpret this.

One possible line of speculation is that a decisive move by France away from austerity policies would politically isolate Germany and put unbearable pressure on the Germans to relent on both fiscal and monetary policy. This could conceivably be interpreted bullishly in markets for risk assets.

Another interpretation is that a Hollande victory would throw Europe into political and economic disarray. In this scenario, Germany would refuse to renegotiate the "fiscal union" treaty and/or back away from demands for fiscal austerity. Under this scenario, various bailout measures (e.g. increase of firewall) that require German approval would languish and/or unravel as the Germans refused to support measures that do not mandate the requisite austerity conditionality. It is also quite possible that under this scenario in which fiscal commitments unravel, the ECB - which has implicitly made its help conditional on the implementation of tough fiscal austerity - would refuse to engage in further sovereign bond purchases in the event that there is renewed selling pressure on these securities. The withdrawal, or threat of withdrawal, of ECB support for the sovereign bond markets would be a major psychological blow to global markets for risk assets.

There are other possibilities. For example, Hollande could simply immediately renege on his campaign promise once elected and not demand renegotiation of the fiscal union treaty. In this case, a Hollande victory would be of little significance.

Only one thing is clear: Hollande is a wildcard. The prospect of a Hollande victory raises a specter of enormous uncertainty in European economic and political affairs.

Investors that own or that are considering purchase of stocks with large international exposures such as Exxon Mobil (NYSE:XOM), IBM (NYSE:IBM) and Citigroup (NYSE:C) or equity index ETFs such as (NYSEARCA:SPY), (NYSEARCA:DIA), or (NYSEARCA:VGK) should be aware of the risks that this sort of uncertainty entails. All of these stocks and index ETFs derive a very large portion of their revenue and earnings from European and other non-U.S. sources and are highly vulnerable to adverse developments in Europe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.