Euro zone crisis tests Hollande’s credentials


When Francois Hollande waded into the euro zone debt crisis after taking office as French president, his push for a new focus on growth over austerity was widely welcomed, except perhaps in Berlin.

Two weeks later, ballooning bank woes in Spain and political turmoil in Greece have taken the debate to a new level that has left Hollande in deeper water than he imagined and will test his political and diplomatic skills to the full.

Europe’s lurch back into crisis should allow the French Socialist, one of the EU’s few left-wing leaders, to achieve his initial policy goals: a pro-growth pact and more time for euro zone states to reach their deficit reduction goals, Reuters reports.

But German Chancellor Angela Merkel has responded to his push for the euro zone to mutualise its debt through joint bonds by challenging Berlin’s partners to leap towards a fiscal union, something that could come at a high political cost in Paris.

Although Hollande supports closer European integration, persuading French lawmakers and voters to hand over more budgetary sovereignty to Brussels could be a hard sell, raising the risk of a referendum defeat or street protests.

The question of whether Hollande might prove soft on budget discipline has moved on to whether he will have the stamina to stand alongside Germany and lay foundations for a fiscal union that, along with an integrated bank sector, may be the only way to save the ailing single currency union.
“The relatively modest growth measures Hollande has pushed for will likely be agreed but are not enough to save the euro zone from a dangerous spiral. The debate has moved beyond that,” said Thomas Klau at the European Council on Foreign Relations.
“There is a consensus that the euro zone needs to act very fast in agreeing steps towards a transfer of power away from national capitals to existing or new European institutions. That confronts the new French government with an unexpected difficulty and a choice it may not be keen to make so early on.”

With alarm growing over the euro zone’s future, EU leaders are set to devote a June 28-29 summit to discussing Merkel’s push for more central power to manage euro area finances and agree a path towards a formal accord a year from now.

Germany may only consider a road map to euro bonds or an integrated banking union – measures that would ease the problems of countries like Greece and Spain – if euro zone states agree to major new powers for EU institutions.
“You can’t ask for euro bonds, but then not be prepared to take the next step towards closer integration,” Merkel said on Saturday in a comment that seemed aimed at Paris.

A staunch pro-European, Hollande would have to get any constitutional changes passed by a three-fifths majority in the new parliament and the conservative opposition or his hard-left allies may make their support conditional on public approval by referendum.

The mere thought of a referendum would make Hollande shudder, after his campaign as Socialist Party leader for a “yes” vote in a 2005 referendum on a European constitution ended in defeat, splitting the party. Awkwardly, Hollande’s foreign and finance ministers are from the 2005 “no” camp.

Signs that former president, Nicolas Sarkozy, might agree to hand Brussels power over national budgets early this year enraged the French.

If Hollande forced through such measures with no referendum he could trigger protests, analysts say, given the public’s fear of any outside tampering with the country’s social model.
“The government is ready to be more federalist and have more integration but it is not ready to ditch what matters to the people,” said economist Jacques Delpla.

For now, Hollande is limited in what he can promise out loud to his EU partners by the approach of a two-round parliamentary election on June 10 and 17 when his Socialist Party must rally supporters to win the biggest working majority it can.

Aside from tying Hollande’s hands temporarily, the election is taking key ministers like Finance Minister Pierre Moscovici away from their desks as they campaign for their parliament seats in sometimes remote constituencies.


Outside observers, who knew little of Hollande when he defeated conservative Sarkozy on May 6, are keen to find out what he will put on the table and demand in return when he meets his German, Italian and Spanish counterparts on June 22 in Rome for a preparatory meeting before the EU summit.

People close to him say that with Germany set to accept a modest growth pact to accompany the fiscal discipline treaty agreed earlier this year, the French leader will most likely pledge in return to ratify the pact in parliament.

A new goal that has arisen for Hollande over the last few days is to bring Germany around to the idea of a banking union that would jointly guarantee deposits and take the strain of dealing with over-leveraged banks off national governments.

Such a union would cushion Paris from French banks’ high exposure to countries like Italy, although the banks themselves may object to being supervised out of Brussels.

Hollande will also push for more flexibility to adjust countries’ deficit goals to reflect economic cycles, a measure he may hope to apply to France, where growth is stalled, despite Moscovici’s insistence that budget goals will be met.

Jean Pisani-Ferry, director of the Brussels economic think tank Bruegel, said he was likely to focus time on those measures now there is broad agreement on his growth ideas like project bonds and a greater European Investment Bank role.
“Hollande needs to define his war aims,” Pisani-Ferry said, arguing that Paris should not expend much political capital on relatively paltry growth initiatives.
“France’s objective should be a banking union. France should also press for a new consensus on the timetable and modalities of the competitiveness adjustment among euro zone countries.”

Using a clause in the EU’s “six-pack” rules on national budgets that allows for slack on deficit goals in recession years, the Commission has suggested Spain be given an extra year to bring its deficit below a 3 percent EU ceiling if it comes up with a credible budget plan.

Hollande wants to mark a change from Sarkozy and Merkel’s “Merkozy” power duopoly by showing a willingness to help rather than admonish struggling nations, a senior adviser said.
“Hollande has shifted the line with the idea that the EU is there to show solidarity,” he said, adding: “That does not mean slacking on budget commitments. A country like Greece shouldn’t be able to shrug off its commitments and stay in the euro.”

An economist who advises Hollande said he would push for deficit targets to be restated in structural terms, meaning more flexibility than under the six-pack. “That would make a big difference for a number of countries,” he said.

For France, Hollande asked the national audit office to submit an in-depth report on public finances after the parliamentary election, which may show growth is flagging.

The European Commission said last week that France may miss its 3 percent deficit goal next year. Economists polled by Reuters said the 2013 deficit could rise to 4.6 percent from 4.4 percent this year. Some analysts expect Hollande may seize the opportunity to ask for more time.
“I think Hollande will push the 3 percent goal back by a year or two, and he would be right to,” said Delpla, a member of the previous government’s council of economic advisers.
“When you put your credibility on something which is not attainable, you lose credibility.”


Hollande’s credibility will also be tested in his handling of Greece, which is near bankrupt and could crash out of the euro if radical leftists who oppose its bailout terms win a June 17 election.

Hollande has shown sympathy to southern countries, meeting Greece’s former finance minister, Evangelos Venizelos, and Spanish Prime Minister Mariano Rajoy before informal EU talks on May 23, whereas Sarkozy would have huddled with Merkel.

But aides say he is aware he would damage his standing if he looks like a soft touch and say he will not agree to keep doling out aid to countries that slip back in austerity efforts.
“(On that) he will agree with Merkel,” said the adviser.
“You have to be clear on what you say to the Greeks. If you say we understand it’s hard, we can soften the conditions, then (radical leftist) Alexis Tsipras will say: ‘Great, vote for me and there will be no more austerity’.”

In the three weeks since Hollande took up office, his aides have gone almost completely to ground over his long-term plans.

That has raised the suspense over his appearance at a June 18-19 G20 Summit in Mexico which, coming the day after the parliamentary vote, will be his first chance to speak freely.

With Merkel, Rajoy and Italian Prime Minister Mario Monti also present, the euro zone crisis will dominate the event.
“People are nervous about Hollande because he’s not been completely explicit about what he wants on either growth or austerity,” said a diplomat from a northern euro zone country.
“Everybody understands he has to get through the election, that he cannot be seen by voters as caving in and that he has to be as non-committal as possible. But he will soon crash into reality and people want to see what he will do.”