Belfast Telegraph

Race for Presidency will reflect on rest of Europe

By Hamish McRae

It is countdown to a new regime in France, with the latest negative data on the economy tipping the balance of probability against the incumbent - however unfair that might be.

It may well be the outcome will be determined by the campaign itself, but what can be said ahead of the two rounds of voting is that whoever wins, there will be a change of direction in French economic policy. The French will not be voting for more austerity, indeed they may vote against it, but that is what they will get.

What happens in France matters enormously to the future of the eurozone, and not just because of its size as second only to Germany within it. It matters because it is the hinge of the zone. In some ways it resembles the southern fringe, having lost competitiveness since the euro was founded and having relatively high national debts. But in other ways it resembles the northern bloc, with competitive companies and a government that has been committed to correcting its budget deficit. It has not made as solid a recovery as Germany, but its performance is vastly better than that of Italy or Spain. So far France has avoided dipping back into recession, but the economy is currently flat, and if you look at the implications from surveys of company opinion, at least one quarter of negative growth looks on the cards.

You can catch a feeling for this "in between" status by looking at bond yields. German 10-year bonds trade at around 1.7%; Italian ones are 5.5%; and French are currently 3%. (UK 10-year gilts are just under 2.1%t; US bonds just over 2%.)

Of course that is just a snapshot, and before Christmas, when fears about the eurozone were at their height, French yields reached 3.5%. But you can see the way the country's creditworthiness is regarded: not as good as Germany (or the UK and US), but not bad by eurozone standards.

The issue is whether that might change - in one direction or the other - after the election.

There are two broad ways in which you can analyse the election. One is to look at the two candidates' stated plans; the other is to make an intuitive judgment, not just about what they might do in practice but how the country might respond.

On the plans, there have been the high-profile comments of Francois Hollande on tax and the labour markets: a millionaires' tax rate of 75%, some cuts in VAT, and job creation in the public sector. At a macro-economic level, Mr Hollande promises a slower correction of the budget deficit than President Sarkozy.

You could say that under a Sarkozy presidency the markets would have more confidence that the deficit was being brought under control, whereas under a Hollande presidency there would be a danger that there would have to be some sort of emergency change of direction a few months in. But if growth disappoints this year, actually both candidates would have to change course.

The question really is whether a change of president would encourage the country to look back to its dirigiste past or whether a change of leadership would itself have a positive impact.

It might be easier for someone coming from the left to sell structural change to the French than it would be for an incumbent from the right to continue doing so.

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