If Hollande wins French election, Europe won't collapse – just shift a bit

Last night, most of France watched presidential incumbent Nicolas Sarkozy and challenger François Hollande battle it out in the big debate before Sunday’s vote. Europe, and arguably, the world, will be watching to see who comes out ahead when the two men face off in a run-off election May 6.

Socialist Hollande – who is ahead in the polls and favored as France’s next president – is not happy with the austerity economics preached by the more conservative Mr. Sarkozy and his like-minded German partner, Chancellor Angela Merkel. Those policies may have helped calm the financial markets and bolstered the euro as one indebted country after another has faltered – but they’ve also brought out street protests and slowed economic growth.

Conventional wisdom foresees a battle royale between France and Germany should Mr. Hollande win. But I expect something more like a subtle adjustment.

True, conditions seem set for confrontation in a Europe divided into two camps: the jailers and the bailers. The bailers want the European Central Bank, ultimately Germany, to stimulate growth and bail out ailing Latin Europe. The jailers, led by Germany, want to impose strict austerity until Club Med reforms.

The election of Hollande would be the first tangible result of a popular uprising against the reigning forces in Europe that preach pain before gain. According to this view, a weakened, yet stubborn Chancellor Merkel would be home alone in Berlin, still unwilling to unlock the shackles of her poor Latin brethren. The result, many believe, is likely to be policy gridlock, market turmoil, and a new and dangerous phase of the euro crisis.

It is certainly true a Hollande presidency would challenge the certainties of the German-led northern European camp. But the consequence of fresh tensions will not be mud wrestling and policy gridlock. Rather, Europe is likely to see a gradual political rebalancing after an extended reign of national leaders from the center right.

Why? Because the markets will keep François Hollande in check while he keeps Angela Merkel in check. In the end, it all sounds a lot like what the French call cohabitation and the Germans call grand coalition – a collaboration of the major political forces, only this time on a European level.

Hollande would lead a country that was recently stripped of its coveted AAA status. France has lost 500,000 industrial jobs over the last decade. As a consequence of its shrinking export sector, its current account deficit is reaching record levels. While the country’s competitive position has been deteriorating, unemployment is rising, hovering around 10 percent. The country’s debt-to-GDP ratio is just shy of the 90 percent that economists consider dangerous.

Hollande wants to use the state to combat these ills. But already, the state consumes 56 percent of gross domestic product. Yet Hollande proposes to increase that ratio further by increasing taxes. He will certainly need new revenue, and lots of it, to pay for his reforms which the German magazine Der Spiegel mockingly calls “superhits of the eighties”: hire 60,000 new teachers and 5,000 police officers, lower the pension age from 62 to 60, and keep the 35-hour work week. At the same time, Hollande pledges to meet the European Union budget rules by 2013.

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