Thursday, May 24, 2012

France: The socialist candidate turns out to be a socialist

President Hollande has begun to show his true stripes. It turns out he wasn’t kidding, and meant what he said during the election. You may recall that we were confidently told that there was little difference between Hollande and Sarko besides personality (Sarko mercurial, Hollande stable), and that once in office, Hollande would follow in Sarko’s prudent footsteps.

Au contraire.

Instead, he turns out to be an honest, naive little man (just like he looks). Like Nixon with Vietnam, he had a secret plan to solve the riddle of the eurozone: he would gather together all of the needy in the eurozone and order Merkel to guarantee a joint eurobond. He flew to Berlin and demanded a eurobond. Angela said no. He flew to Camp David and caucused with Club Med, ganging up on Merkel to make her relent. He made a grand entrance at the recent Brussels summit, walking in with Spain, leaving the Chancellor to walk in alone.

We are now being told by the media that all of this has been for home consumption in France, and that it is not to be taken too seriously. I see no reason to think this. I think that Hollande is quite sincere, and that he does not see a double-dose of austerity as the eurozone’s salvation. He believes that growth via greater fiscal unity is the only way out.

He may be right, but it’s not going to happen. He wants the eurozone to issue a bond with the joint and several guarantees of its members. As the guarantee is several, it means that the German people will agree to guarantee (assume) the debt of all of the other members, including Greece, Italy, Spain, Portugal, Ireland and--yes--France. Good old AA- France.

As a former rater, I will point out that when a guarantor guarantees something small, it gets his rating. But when it guarantees something enormous (like a continent) it gets a blended rating. That means you have to calculate standalone ratings for each country, multiplied by each country’s weighting (GDP or whatever). It also means that the guarantee has to be credible and irrevocable, which this one is unlikely to be.

But that aside, there is no way that Germany is going to become a part of a large mediocre sovereign credit that they do not control. Even in 1789, no one asked New York to guarantee the debts of the other twelve states. (New York was a good credit once).

To allow Hollande to save face, Merkel has said that she will “study” the idea of some sort of a joint bond. The SDP opposition has criticized her for being intransigent on this. But that is completely disingenuous. If the shoe were on the other foot, they’d do what she’s doing. The SPD is German long before it is socialist. (Most of Germany’s recent structural reforms were implemented by the SDP under Schroeder.)

All of this would be light opera if Europe were not teetering on the edge of the abyss. Right now, big decisions have to be made. Since there won’t be a deus ex machina from a German bailout, what can be done to save the eurozone? To what extent, if any, will Germany contribute to an enhanced ESM? To what extent, if any, can the Bundesbank be persuaded to provide unlimited liquidity to troubled banking systems? Will or won’t the ECB directly buy the bonds of the peripherals?

And, in Hollande’s own yard, whither French austerity? His first act as president was to lower the retirement age from 62 to 60, a pretty clear signal that he is not afraid of reversing engines.

So we now find that Hollande is not a sheep in wolf’s clothing, but indeed a wolf. At the very moment when the French people must decisively signal that they are Northern European, they have elected a man who prefers to hang out with the deadbeats in Club Med.

And the media is still telling us how awful Sarko was, and what a nice man Hollande is. I hate to say it, but the people of France have made a very serious mistake. They will realize that before the end of the summer.

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