Farewell to Austerity

Mr. Hollande is now the President of France. Voters on the other side of the Channel, have had enough with austerity. They elected a Socialist, promising to tax the rich, spend more, and get France growing again. The new President is even talking about lowering the retirement age. It is all great stuff.

The Bond Market might have different view. We will see soon enough. The markets open tomorrow, and it will prepare a suitable greeting for the new French President and his anti-austerity rhetoric.

Mr. Hollande will inevitably try to say something soothing for holders of French government debt. He will hint at a more pragmatic approach. Election promises from European politicians are not binding contracts. One needs to say all kinds of things to get elected. Much of it is not meant seriously. Once one is in office......

Mr. Hollande will probably carry the same message to Mme Merkel. "Don't worry old girl" he will say "France might talk a populist game, but it won't actually do anything stupid".

With the French having only a tenuous grip on reality, Mrs. Merkel is now the only grown up in the room. She knows that there is no alternative to a painful and prolonged period of fiscal downsizing. There is no route out of this crisis that involves higher government spending or lower retirement rates. Mrs Merkel will have to slap Mr. Hollande down and take control.

She has a few cards up her sleeve. The fiscal compact, which forms the basis of the European drive towards austerity, is a done deal. She won't agree to any renegotiation. Hollande's idea of allowing the ECB to borrow directly to governments is also dead in the water. Merkel will never agree to it.

Meanwhile, the European Commission has picked up on the fact that Mr. Hollande's election is a game changer, at least in terms of political sloganeering. Its commissioners have begun to de-emphasize the need for fiscal consolidation. They are talking up the need for growth and employment-friendly policies. Growth is a word that drops off easily from the lips of European politicians. None of them have the slightest clue how to achieve it.

The French weren't the only ones going to the polls. The Greeks also had an election. Like the French, they voted to put an end to austerity. Unfortunately, they couldn't decide which way to go. Some went to the extreme left; others jumped to the extreme right. Greek politics is now horribly fractured, with the traditional parties reduced to impotent rumps. The unity government comprising of the socialist Pasok and the conservative New Democracy is over. Forming a new government out of the the disparate collection of irreconcilable parties seems an impossible task. Although no one will say it, the Greek election result was the materialization of everyone's worst case scenario. The Greek thing is about to flare up again.

So where are we? We have a French President promising to implement an economic programme that will see French debt levels sky-rocket. It is a programme that will dismantle the unified Franco-German alliance on the need for austerity; the only thing that held the Eurozone together. The only hope is that he didn't mean what he said and that his electoral platform was a cynical ruse. Meanwhile, the Greeks have voted to have no government. Back in Brussels, the European Commission are talking about growth, without a single credible idea as to how to kick start the European economy. Taken together, this weekend's developments will scare the Bond Market witless.

The Euro has never looked more vulnerable.