Hollande victory could cause bond market 'bloodbath'
by Daniel Mason
Victory for socialist candidate Francois Hollande in France's presidential election could strain relations with Germany and lead to a "bloodbath" in financial markets, Deutsche Bank's chief economist has warned.
Thomas Mayer, speaking at the Institute of Economic Affairs' annual State of the Economy conference in London yesterday, said that if Hollande and German Chancellor Angela Merkel "really clash" on policy then investors might take fright, potentially leading to a sharp rise in French bond yields.
The close political partnership between Merkel and current French President Nicolas Sarkozy has been the bedrock of the European Union's austerity-driven response to the debt crisis. The German leader has given her public support to Sarkozy's campaign for a second term, which he officially launched last week, and British Prime Minister David Cameron gave his backing to Sarkozy when the pair met in Paris last Friday.
But by standing as an anti-Sarkozy candidate in the April and May polls, Hollande was also an anti-Merkel candidate, Mayer said, and if he won the presidency it could make his relationship with the chancellor "very difficult to begin with". One potential point of conflict is Hollande's call for the renegotiation of the fiscal stability treaty to include more measures to encourage growth. The treaty was strongly pushed by Germany and binds the 25 EU countries taking part to strict limits on public debts and deficits.
After "patchy starts" French and German leaders have always come together "in the end", Mayer said, but the question was how long it takes in the case of Merkel and Hollande. If they failed to build a strong relationship quickly the "bloodbath" in the bond markets could see the spread between French and German debt widen significantly, causing fresh instability in the eurozone. However, he said the most likely scenario in the event of a Hollande victory was a more modest rise in French bond yields.
His view echoed that of George Magnus, senior economic adviser at UBS. In an article for Bloomberg published this week, Magnus said a Hollande presidency would create the conditions for a "new wave of instability" in the eurozone with "far reaching consequences for financial markets and the euro system itself". He said the election could be seen as a referendum on the German approach to dealing with the economic crisis.
Meanwhile, Mayer said it was "hard to prove that there was a tangible economic benefit from the euro" but the single currency had to be understood as a political project, made to work in its first 10 years by the "glue" of cheap credit. He said those who predicted the euro's demise often forgot the "political forces of cohesion" keeping it together – in particular the post-war "compact" between France and Germany to bind Germany into European structures. Saving the euro would be "difficult" and "full of a lot risk", he said, but there was enough political will to keep together, even if it eventually consists of a smaller core of countries.
This is really an arrogant and anti-democratic attitude shown by a high-positionised economic "expert". We like democracy when it suits our economival interests. A bureaucrat sends a warning to the French people: Keep Sarkozy, otherwise it could turn out badly. For whom? For the financial elite or for the increasing numbers of poor and unemployed people? It is time for a shift of power and to stop the robbery of public property driven by the non-democratic Troika.
Dag M Furevik - Bergen, Norway