Investment concerns over French election

France’s government debt will near an estimated 90 per cent of gross domestic product this year.

To the list of worries about the eurozone, add one in bold: the fate of France as it heads into the first round of a closely contested presidential election this weekend. After a long stretch in which president Nicolas Sarkozy grappled with the euro crisis, investors are now wrestling with the implications of a potential victory by the Socialist candidate, Francois Hollande. Hollande’s pledges of higher taxes on the rich, and higher government spending, are luring voters disenchanted by the austerity medicine Sarkozy has administered in hopes of protecting France from financial contagion.

Many investors, though, are questioning what a government run by Hollande would mean for France’s economic competitiveness and its ability to keep clear of the financial turmoil that has once again lifted the borrowing costs of two other big eurozone countries, Spain and Italy. A surprisingly successful bond auction by Spain on Tuesday at least temporarily buoyed the financial markets in Europe and the US. But the underlying concerns for Spain and the region have not gone away. And with polls showing Hollande as at least an even bet to oust Sarkozy, a fog of financial uncertainty has enveloped France, Europe’s biggest economy after Germany.

Crass effort

“If you combine an election of Francois Hollande with a worsening economic situation, no improvement in Spain, and a possible new downgrade of France by the ratings agencies, there is a high likelihood” that France’s borrowing costs will also rise, said Evariste Lefeuvre, chief economist at the French investment bank Natixis in New York. Such sentiments are viewed warily by many French voters, and Sarkozy’s opponents, who are exasperated by what they see as a crass effort by financial players to browbeat France into accepting more of the type of austerity measures that have squeezed growth in Greece, Spain and other troubled eurozone countries.

The German derivatives exchange, Eurex, ignited a political furor in France when it began trading a futures contract Monday enabling investors to hedge their bets on French government debt. The apparent premise is that France’s creditworthiness could slip if the government – whether led by Sarkozy or Hollande – backslides on efforts to cut its debt and deficit. Executives at Eurex said the timing was a mere coincidence.

Hollande blamed the German exchange for encouraging speculation on France’s insolvency, and said that if he were elected, he would try to get the new Eurex contracts eliminated. With the campaign heating up, Hollande accused Sarkozy of encouraging market speculation against France by playing up fears that Hollande’s supposed tax-and-spend programmes, together with his inexperience in dealing with the financial crisis, could push France’s borrowing costs toward levels that would make it harder for the nation to pay down its debt.

France’s government debt will near an estimated 90 per cent of gross domestic product this year – the fifth highest in Europe and well above Germany’s estimated 78 per cent, according to the International Monetary Fund. Sarkozy, for his part, has not been shy about sounding his own populist notes in counterattacking Hollande. On Sunday, the president raised eyebrows in financial markets and in Germany, by telling a rally in Paris that if he were re-elected, he would open a debate on widening the European Central Bank’s legal mandate to let it promote growth through monetary stimulus.

A central plank of Hollande’s platform revolves around restoring social equilibrium in France, which he says Sarkozy has upset by giving tax breaks to the wealthy, giving employers greater leeway in hiring and firing, and threatening the sanctity of the 35-hour workweek that an earlier Socialist government put in place. Hollande also contends that the cuts to government and social programmes made in the name of reducing the budget deficit have hit the working class too hard.

Sarkozy plans to raise value-added taxes on consumer products. He would continue a programme of reducing government employment by replacing only one of every two civil servants who retire. He would also reduce France’s financial contribution to the European Union budget and to local authorities, as well as freeze spending on certain portions of France’s health care system.

Hollande, in contrast, is pledging to increase taxes on the wealthy to pay for significant new spending intended to spur the economy. He promises to raise 29 billion euros (about $38 billion) in new revenue while lifting spending by 20 billion euros.

NYT