French Elections Will Save The Global Economy — Or Hasten Its Collapse

The outcome had been staring the world in the face for weeks, but Francois Hollande’s weekend victory in the French elections nevertheless sent foreign markets plummeting, reflecting the fact that the Eurozone crisis is still a huge global concern, and that Nicholas Sarkozy’s defeat adds an element of uncertainty to an already chaotic situation.

But the markets’ visceral reaction to the election masks a more complicated reality. According to experts who’ve been watching the Eurozone mess unfold for years, the market panic doesn’t suggest that the previous regime was on the right course, and fell victim to the impossible politics of austerity. Quite the opposite. Austerity was unpopular both because of the immediate burden it imposed on voters and because it was failing at its supposed purpose of restoring stability to the Eurozone. But pro-austerity forces remain strong both in Europe and around the world, and even a signal as clear as the elections in France or the collapse of the Dutch government last month might not convince them to reconsider, and that has potentially disastrous consequences for the global economy.Hollande’s victory creates a rift between the Eurozone’s leading economies, France and Germany, and leaves key questions unanswered. Can France internally settle on a plan for resolving the Euro crisis and bring that program to the negotiating table with Germany? Can Germany be convinced to budge from its ruinous insistence on austerity across the Eurozone? And can the two countries, with buy-in from the rest of the EU, reach accord on a new path forward? If the answers to any of these question is “no,” the consequences could be explosive.

Art Goldhammer, a European politics expert at Harvard University, says a great deal now depends on how Hollande intends to grapple with obstinate leaders in Germany and at the ECB.

“Germany has already refused to renegotiate the fiscal pact,” Goldhammer wrote — an ominous sign that the coming deliberations will be brutal.

In a statement after the election, Hollande indicated he’ll demand that Germany must finance the issuance of Eurobonds or drop its objections to allowing the ECB to purchase debt from Eurozone countries outright. He also wants Germany to seed a European Investment Bank that will direct funding to industrial projects in struggling Eurozone economies.

“The Germans aren’t going to like that but I think even in Germany there’s a recognition that the center is not holding, that there’s a real danger people in the streets, or governments emerging that are hostile to the Euro or even the European Union,” Goldhammer said in a Monday phone interview. “The Germans don’t want that to happen, they’ve benefitted greatly from the single market. They would like to preserve the European Union. They’ll at least entertain some suggestions about what might be done about it.”

If that’s true, it’ll be incumbent upon Hollande to rise to the moment and lead his own country, along with other governments in southern Europe and members of social democrats elsewhere in Europe to pressure Germany and the ECB to do an about face.

And there are doubts about his capacity to provide that level of leadership.

“France and Germany are at the center of this, but they know they can’t go on negotiating among themselves and then imposing their solutions on the rest of the Eurozone,” Goldhammer said. If he’s smart, Goldhammer added, Hollande “will be looking for buy-in from other social democratic parties outside France, but he’ll also be looking for the southern countries.”

What happens if this fails to come together at any point along the way is a mystery fraught with peril. “What happens will then be determined by events,” Goldhammer says. “Countries could decide to leave the Euro. There’s no mechanism for that but they could unilaterally say they’re leaving.” The economic fallout could be catastrophic. And there’s reason to despair.

“I don’t think that the austerity school is on the brink of being overthrown, or anything like it,” says Henry Farrell, an EU politics expert at George Washington University. “What is really important in all of this is the near-unassailability of the [European Central Bank]. It is not subject to the whims of voters or elections, even elections as big as the French elections. If all the member states bludgeon it into doing something, it may reluctantly accede — but the emphasis is on the word ‘all.’ As long as Germany is not enthusiastic about change, then the ECB is unbudgeable. And it is still full of people who are pro-austerity.”

But there’s also an optimistic way to look at this new, messy configuration.

“Germany’s experience isn’t, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it’s an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth,” writes New York Times columnist and Nobel Prize winning economist Paul Krugman. “The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago.”