Does the Election of French Socialist Francois Hollande Spell the End of the Euro?
It's the end of the Euro as we know it, and I feel fine...
In terms of international news, the election of French Socialist Hollande hasn't been as widely reported as one might expect given that it may prove the undoing to the Euro. Running on a platform that doubles down on the social expenditures that have held the world hostage, Hollande has expressed a desire to end all austerity measures in France, and return to the debt driven spending that has crippled the Euro zone for the past few years. Further, Hollande has promised to tax the highest earning French at a 75% marginal rate and raise corporate tax rates.
Should Mr. Hollande live up to his word, it seems unlikely that the Euro will survive. With austerity measures at the heart of the Euro bailout (largely funded by the Germans), it would seem that many Europeans have simply decided that they are happier to drive into a wall, rather than face the arduous task of shoring up their collective balance sheet. Given the reluctance of Germans to continue funding the spending of their Euro neighbors, it is difficult to believe that German Chancellor Angela Merkel will have the political capital or political will to continue to fund the irresponsible behavior of her neighbors. Indeed, with the elections in France and Greece, it seems almost inevitable that the Euro will survive should the political promises of elections result in a political reality.
What about Greece?
To date, Greece has taken nearly $300 Billion from its Eurozone counterparts in exchange for significant reduction in government spending. The result has been predictable. A people who have long lived off of Government largess find themselves incapable of making their own way. Much like a beaten bog, they have long cowered to their master. Without hope, they have simply taken to streets demanding money that simply isn’t there. If, as some predict, Greece leaves the Euro zone, they will regain flexibility relative to their currency, but they will pay an incredibly high price in inflation and reductions in borrowing capacity. The likely scenario, should they leave the Euro, will be massive expansion of their monetary supply, to devalue the debt they have incurred. This will of course increase prices dramatically, and in short order, Greece will fall into a recession (and possibly a depression). Further, because they have so weakened the economic engine through government giveaways and regulation, they will not be able to take advantage of their weak currency with exports. Ultimately, the world will witness the abject failure of Greece, with further social unrest and instability.
The French Connection
France will follow a similar path, but it will take a bit longer. Without the inherent controls that the unified currency place on the government, the French Socialists will continue to move in the direction of Greece. A 75% margin tax rate will force the wealthiest citizens out of the country and a disastrous cycle of borrowing and spending will drive French debt toward a breaking point. The current realities facing much of Western Europe will (and must) await France, should policy follow the rhetoric of the campaign. With many European countries already facing a double dip recession, the weakening of France may result in an economic malaise that will hound Europe for the foreseeable future.
It remains to be seen what the fall of the Euro will mean to the world, but a weakened and sluggish Europe, coupled with the unknowns of a major currency collapse will likely make it difficult for us all. Let’s hope that the campaign has ended, and the fiscal realities will moderate the thinking of the newly installed French leadership.