While most Dartmouth students were likely preoccupied with the continuing roller coaster ride that is the Bruins-Capitals series or our men's soccer team's triumph over Cape Verde, the eyes of economists and political commentators were settled on France.
In yesterday's French presidential election, neither President Nicholas Sarkozy nor his socialist challenger Francois Hollande could muster an outright majority of the vote, and the two candidates must proceed to a runoff election on May 6. Hollande remains firmly in the driving seat, however, with polls predicting that Hollande will significantly extend his margin of victory in the runoff. Although the average American might struggle to see the relevance of French politics to their everyday lives, this election could have profound effects beyond France. A Hollande victory would have worrying implications for the still fragile global economic recovery.
Hollande's election would likely undermine investor confidence in France's fiscal security, which may end up sending the world's fifth largest economy spiraling down similar to Greece and Spain. It's clear that Sarkozy has not done everything right regarding the French economy 10 million people are unemployed, growth is minimal and France lost its triple-A credit rating. But he offers a better chance of fixing the situation than Hollande does.
At the heart of Hollande's platform lies a tax rate increase to 75 percent for the top income bracket, a policy borne purely out of political considerations. The proposal will cause a massive exodus of France's wealthiest, and in doing so, place another burden on growth. Despite having pledged to balance the budget by 2017, Hollande has yet to specify any areas where he would cut costs. Instead, he has promised to create 20,000 new jobs in the education ministry and to repeal Sarkozy's money-saving pension reforms. Europe cannot afford to sustain another Greece. Having France, the continent's second largest economy, spiral into economic collapse because of its deficit would have catastrophic ramifications. Hollande may very well lead France to that end, and in doing so, might bring the global economy once more to its knees.
However, the election represents more than just a decision about the economic future of France. It also signifies a direct choice about the future of the Eurozone. Hollande has promised to renegotiate the European Union Rescue Fund to remove the focus on austerity. He specifically wants to remove the requirement for Eurozone countries to keep their budget deficit within 3 percent of GDP, a change which would undoubtedly cause uncertainty to rule once more over the European economy.
Under Sarkozy, France took the leading role in the creation of the E.U. Rescue Fund, designed to stabilize Europe's economy by providing financial assistance to member countries in distress. The fund has staved off investor fears that any number of European countries could default on their debt. Any attempt to reform this "fiscal compact" will undoubtedly rejuvenate the market confusion that crippled the European economy throughout the sovereign-debt crisis.
The effects of economic uncertainty in Europe on the U.S. economy cannot be overstated. This fact is apparent in the fluctuations the Dow Jones Index has endured following developments in Europe. In an increasingly globalized economic system in which U.S. and European banks are inextricably linked and where more than 20 percent of U.S. exports go to Europe, the American economy is highly vulnerable to instability in European markets. Now, more than ever, Americans need to be focused on the French election, and they need to hope Sarkozy overcomes the odds.
Moreover, the French election should be of great interest to anyone concerned with American politics, as there are clear parallels between the political and economic debates going on in both countries. Leaders in both countries face the harsh reality of high deficits and calls to improve growth rates while simultaneously reducing spending. It's unclear whether Hollande's steady lead is a result of a pervasive mood of defiant populism fixed on removing an out-of-touch right-wing president or is simply the consequence of an anti-incumbent sentiment demanding change. An answer to this question would offer great insight into U.S. President Barack Obama's hopes of re-election come November.
A Hollande victory would bring no tangible plan to reign in France's soaring deficit, would strike mayhem at the heart of the Eurozone economy and could affect the global economy at large. We would do well to sit up and pay attention.
