Paris: The spectre of the eurozone crisis has returned to haunt France's presidential election, with President Nicolas Sarkozy using the launch of his campaign manifesto to accuse François Hollande, his Socialist rival, of threatening the country with the fate of Greece or Spain.
Casting himself as the guardian of budgetary rigour and economic reform, Mr Sarkozy said it would take just two days for financial markets to turn on Mr Hollande's "festival of spending plans" if the Socialist leader beat him in the election, which takes place over two rounds on April 22 and May 6.
But with markets already registering renewed concern over developments in Spain, whoever wins the Elysée palace is likely to come under close scrutiny.
"I think the new French government will be given very little time to convince the markets about its plans," said Laurence Boone, Europe economist at Bank of America Merrill Lynch.
Mr Hollande, who is holding on to a significant opinion poll lead for the assumed second round run-off against Mr Sarkozy, is mostly in the spotlight.
He issued a plan this week to restore the public finances to balance in 2017. But without any detail on spending cuts, it was new taxes and spending pledges that caught the eye – notably the longstanding promise to reverse partially Mr Sarkozy's flagship pension reforms by allowing those with 41 years of contributions to retire at 60, not 62.
Overall, Mr Hollande's programme includes €20bn of new spending, offset by a range of tax increases, including his now famous proposal for a 75 per cent marginal rate on incomes above €1m.
Mr Sarkozy's manifesto includes €9.5bn of his own tax cuts and spending proposals. This week he outlined figures showing spending cuts would make up more than 60 per cent of the €125bn savings needed to meet his target of eliminating the budget deficit by 2016 – while Mr Hollande's proposals envisage a balance between cuts and taxes.
But markets are concerned that neither candidate has been sufficiently radical on spending cuts or the kinds of structural reforms now being pursued by Mario Monti in Italy that would underpin economic recovery, unwind a €70bn trade deficit, and ensure the country's ability to manage a public debt nudging close to 90 per cent of gross domestic product.
"There is not enough debate about the spending side of the adjustment, and on the strategy for growth," says Ms Boone. "None of the politicians are ready to explain the tough decisions ahead and provide the diagnosis. So what will happen when they have to take the decisions?"
Mr Sarkozy is committed to measures to switch some of France's high employment costs on to value added tax and loosen the labour market by giving companies the right to negotiate working hours and wages, both of which Mr Hollande has rejected.
But what is striking is that both the main candidates envisage the continued preponderance of France's big welfare state and the enormous public spending bill it swallows, albeit with Mr Sarkozy proposing a slightly more aggressive reduction than Mr Hollande.
By 2017, public spending as a proportion of gross domestic product would remain at 54 per cent under Mr Hollande and 52 per cent under Mr Sarkozy – at the top of the eurozone range.
In a recent interview with Challenges magazine, Jean Pisani-Ferry, director of the Bruegel think-tank, said Mr Sarkozy's first term reforms marked an "inflection", not a "rupture" when it came to the scale of state spending. "There has not been a change in the perimeter of the state but a search for efficiency gains within the perimeter."
Alain Juppé, the foreign minister, underlined this in an interview with the Financial Times earlier this week. "We must rebalance things, but we are not ready to renounce this social model, which characterises the French economy and which allowed us in the past to be very competitive," he said.
The challenge for whoever wins the election on May 6 will be to convince sceptical financial markets that this commitment can be reconciled with managing a debt burden that is still growing.
Copyright The Financial Times Limited 2012
Posted on www.ft.com on April 6, 2012 8:32 pm
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