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Parallels and differences with Mitterrand in 1981

Parallels and differences with Mitterrand in 1981

Hollande fights on many fronts to match up to Germany

by David Marsh

Tue 8 May 2012

François Hollande’s victory on Sunday, containing some remarkable parallels with François Mitterrand’s triumph as modern France’s first socialist president 31 years ago, opens up a new phase of in-fighting within economic and monetary union (EMU).

Hollande’s crushing of President Nicolas Sarkozy was the easy part. As the euro scene darkened anew with the sharp gains for anti-austerity parties in the separate Greek election, the hard pounding for France’s president-elect begins immediately.

Three decades ago, when Hollande’s socialist predecessor Mitterrand was elected, he unveiled a radical program of Keynesian spending increases and banking and corporate nationalisations that brought three devaluations of the French franc in less than two years. Hollande doesn’t have anything like that time to adjust to reality.

Recognizing the seriousness of France’s position, Hollande says he will speak as quickly as possible to France’s partners, above all Germany, to ‘reorientate Europe towards employment and growth’. Hollande will initially get a sympathetic hearing. But election-winning slogans will no longer suffice. From now on, results count.

When Hollande travels to Berlin shortly, Chancellor Angela Merkel will regret her earlier ill-considered decision to campaign for Sarkozy – a move that was never enacted since Sarkozy realized it would count against him. She will be relieved to deal now with a less impetuous and febrile sparring partner in Paris. But the differences with France remain as strong as ever. They centre on the French wish, which Germany implacably opposes, for the European Central Bank to purchase weaker countries’ bonds and lower the interest rates these debtors pay on financial markets.

Already, German nerves are being strained by the rising cost of shoring up the EMU edifice via the involuntary Target-2 credits from the Bundesbank to the ECB (and then to debtor central banks). Latest figures show this obscure mechanism, essentially financing capital flight from the countries concerned, encapsulates Bundesbank loans of €615bn (23% of German GDP), helping to finance (with other creditor countries) loans to the central banks of Greece, Portugal, Spain and Italy making up respectively 50%, 44%, 26% and 17% of these countries’ GDP.

These colossal imbalances make the circumstances of 1981 when Mitterrand came to power look rather trivial. But there are some important parallels. Both Mitterrand and Hollande – born 41 years apart – have been late-developers, widely under-estimated both in their own and in the conservative parties.

In one key area, French divergence with Germany compared with the Mitterrand era is now less extreme. In 1981, French prices were rising by an annual 13%, against 6% in Germany. Inflation 31 years later in both countries is around 2%. Yet, elsewhere, the imbalances have widened. In 1981, both France and Germany ran small current account deficits, of 0.8% and 0.7% of GDP respectively. By contrast, in 2012 Germany is expected to show a current surplus of 5.6% against a deficit of 1.9% for France. Unemployment differences have persisted, with the French jobless rate 7.4% in 1981 (against 4.8% for Germany), compared with 9.9% in France now (against 5.6% in Germany).

Most important, 23 years after the fall of the Berlin Wall, Germany is reunified. Having overcome most of its post-unification problems, Germany is now registering sustainably higher economic growth than France, opening up what looks like a permanent gap. One of the reasons for Sarkozy’s humiliation is because France under his presidency signally failed to match up to Germany. Hollande is now fighting on many fronts to avoid the same fate.

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