Eurozone: Economics meets politics again

The first round of the French presidential elections and political turmoil in the Netherlands could mark the beginning of new controversies on the Eurozone’s crisis management. François Hollande and Nicolas Sarkozy are the two finalists of the French Presidential elections with 28.5% and 27.1%. Negotiations between the losing candidates and the finalists are likely to be tense. Both Hollande and Sarkozy will now try to get as much support as possible from the losing candidates to win the runoff elections in two weeks. It looks as if François Hollande can probably obtain all support from the left wing without major problems. This support should represent around 15% of the votes. Nicolas Sarkozy is likely to have more difficulties to attract the Front National’s voters (far-right party), which obtained 19%. Marine Le Pen, the Front National’s leader, is a clear opponent of Nicolas Sarkozy. However, her voters are closer to Sarkozy than Hollande. François Bayrou, the centrist leader, has obtained around 9.1%. At this time, he has not given any voting instruction. Polls show his voters could be split in three parts for the second round; 1/3 to Hollande, 1/3 to Sarkozy and 1/3 to abstention. This would secure a victory for Hollande. The main challenge for the second round for Sarkozy is therefore to attract Front National voters and centrist voters. But, at this time, polls show the transfer of vote seems to be favourable to Hollande. Elsewhere during the weekend, the Dutch government negotiations on the budget came to a standstill. Prime Minister Mark Rutte, whose centre-right minority coalition has been in power since October 2010, said on Saturday that crucial talks on budget cuts had collapsed after his ally Geert Wilders from the Freedom Party had refused to do a deal. Since the elections, the Freedom Party had a pact to support Rutte's minority government in parliament, giving it the majority to pass legislation. The Dutch government still needs to find additional budget consolidation to bring its fiscal deficit to 3% GDP next year as the country is running under the so-called European excessive deficit procedure. With Saturday’s decision, it looks likely that new elections will be announced shortly. Interestingly, there does not seem to be a political majority anymore to bring the deficit to 3% next year. Latest developments in France and the Netherlands could lead to a change of their respective political and economic stance. Obviously, both core Eurozone countries are currently running under the excessive deficit procedure and will have to bring their fiscal deficit back to 3% of GDP next year, which would – given this year’s deficits – still require significant additional efforts. Moreover, let’s not forget that both countries (as all other European countries) still have to ratify the new fiscal compact. It should not be excluded that we could see a repetition of the 2002-2004 episode when the fiscal rules were changed after the biggest Eurozone countries had breached them. The drivers behind last weekend’s political developments in both France and the Netherlands are not necessarily the same. However, the outcomes might have one common denominator: they could mark the beginning of a change to the entire Eurozone crisis management.