Presidential Election in France Raises New Concerns for Investors
By LIZ ALDERMAN
PARIS — To the list of worries about the euro zone, add one in bold: the fate of France as it heads into the first round of a closely contested presidential election this weekend.
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After a long stretch in which President Nicolas Sarkozy grappled with the euro crisis, investors are now wrestling with the implications of a potential victory by the Socialist candidate, François Hollande. Mr. Hollande’s pledges of higher taxes on the rich, and higher government spending, are luring voters disenchanted by the austerity medicine Mr. Sarkozy has administered in hopes of protecting France from financial contagion.
Many investors, though, are questioning what a government run by Mr. Hollande would mean for France’s economic competitiveness and its ability to keep clear of the financial turmoil that has once again lifted the borrowing costs of two other big euro zone countries, Spain and Italy.
A surprisingly successful bond auction by Spain on Tuesday at least temporarily buoyed the financial markets in Europe and the United States. But the underlying concerns for Spain and the region have not gone away. And with polls showing Mr. Hollande as at least an even bet to oust Mr. Sarkozy, a fog of financial uncertainty has enveloped France, Europe’s biggest economy after Germany.
“If you combine an election of François Hollande with a worsening economic situation, no improvement in Spain, and a possible new downgrade of France by the ratings agencies, there is a high likelihood” that France’s borrowing costs will also rise, said Evariste Lefeuvre, chief economist at the French investment bank Natixis in New York.
Such sentiments are viewed warily by many French voters, and Mr. Sarkozy’s opponents, who are exasperated by what they see as a crass effort by financial players to browbeat France into accepting more of the type of austerity measures that have squeezed growth in Greece, Spain and other troubled euro zone countries.
The German derivatives exchange, Eurex, ignited a political furor in France when it began trading a futures contract Monday enabling investors to hedge their bets on French government debt. The apparent premise is that France’s creditworthiness could slip if the government — whether led by Mr. Sarkozy or Mr. Hollande — backslides on efforts to cut its debt and deficit.
Executives at Eurex said the timing was a mere coincidence. But for the bristling French, there was no ignoring that it came just days before voters head to the polls this weekend to narrow a sprawling field of French candidates down to two, with a final presidential runoff scheduled to take place May 6.
Mr. Hollande blamed the German exchange for encouraging speculation on France’s insolvency, and said that if he were elected, he would try to get the new Eurex contracts eliminated.
With the campaign heating up, Mr. Hollande accused Mr. Sarkozy of encouraging market speculation against France by playing up fears that Mr. Hollande’s supposed tax-and-spend programs, together with his inexperience in dealing with the financial crisis, could push France’s borrowing costs toward levels that would make it harder for the nation to pay down its debt.
France’s government debt will near an estimated 90 percent of gross domestic product this year — the fifth highest in Europe and well above Germany’s estimated 78 percent, according to the International Monetary Fund.
Mr. Sarkozy, for his part, has not been shy about sounding his own populist notes in counterattacking Mr. Hollande. On Sunday, the president raised eyebrows in financial markets, and in Germany, by telling a rally in Paris that if he were re-elected, he would open a debate on widening the European Central Bank’s legal mandate to let it promote growth through monetary stimulus. It is a power that the Federal Reserve in the United States holds, but that is now largely off limits to Europe’s central bank, which is supposed to focus mainly on controlling inflation.
Mr. Sarkozy’s campaign promise irritated his German allies. A spokesman for Chancellor Angela Merkel publicly reminded the French president that the bank needed to remain independent, and that it was the duty of each euro zone country to manage its own finances.
A central plank of Mr. Hollande’s platform revolves around restoring social equilibrium in France, which he says Mr. Sarkozy has upset by giving tax breaks to the wealthy, giving employers greater leeway in hiring and firing, and threatening the sanctity of the 35-hour workweek that an earlier Socialist government put in place.
Mr. Hollande also contends that the cuts to government and social programs made in the name of reducing the budget deficit have hit the working class too hard. Such rhetoric has strong appeal at a time when the country is facing a shallow recession, and unemployment remains above 10 percent, the highest level in more than a decade.
But investors are already alarmed by what they see as an erosion of competitiveness among French companies, a widening current account deficit and declining exports.
As a result, investors say France is drifting away from the “core” of strong European economies that include Germany and the Nordic countries. Instead, it is increasingly being lumped together with the weak large economies of Spain and Italy, along Europe’s troubled southern rim.
To turn things around, Mr. Hollande and Mr. Sarkozy agree that France’s budget needs to be balanced soon. Mr. Sarkozy says his program would get there by 2016. Mr. Hollande says his would reach the goal by 2017. Both agree to whittle the deficit down to 3 percent of gross domestic product next year from 5.2 percent last year.
But that is where the similarities end. Mr. Sarkozy plans to raise value-added taxes on consumer products. He would continue a program of reducing government employment by replacing only one of every two civil servants who retire. He would also reduce France’s financial contribution to the European Union budget and to local authorities, as well as freeze spending on certain portions of France’s health care system.
Such pledges do not worry the financial markets as much as Mr. Sarkozy’s promises to introduce a minimum tax on large companies, or collect more taxes from income French companies earn abroad.
Mr. Hollande, in contrast, is pledging to increase taxes on the wealthy to pay for significant new spending intended to spur the economy. He promises to raise 29 billion euros (about $38 billion) in new revenue while lifting spending by 20 billion euros.
A main Hollande plank includes introducing a 75 percent marginal tax rate on individual income above 1 million euros and forgoing the planned increase in the value-added tax. And rather than cut the government payroll, he has pledged to expand it by hiring 60,000 civil servants and teachers. Mr. Hollande would also reverse changes to the pension system instituted under Mr. Sarkozy, by pushing the retirement age back to 60, from 62.
That platform, Mr. Lefeuvre said, is why many foreign investors are hoping for Mr. Hollande’s electoral defeat.
“If he does win, there will be a lot of concern,” Mr. Lefeuvre said.