By Federico Santi, editorial assistant at European Affairs

Reactions to the victory of François Hollande, the first socialist to hold the French presidency since 1985, have dominated the news for days as leaders and observers around the world assess the impact that his victory, along with the tumultuous election in Greece, will have on the way Europe will deal with the current economic crisis and the swirling debate on austerity versus stimulus for growth.


German chancellor Angela Merkel, who was critical of Hollande’s threat to renegotiate the Fiscal Compact signed in March, has reiterated her belief that the debt crisis was a result of the coordinated stimulus packages passed in 2009 by many EU countries. She was very clear on the subject of austerity: “we in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable” since “it has been negotiated and has been signed by 25 countries.”

 Merkel, nonetheless, acknowledged the need to come to terms with the newly-elected French leader and to find common ground at a news conference last Monday, when she stated: “We are in the middle of a debate to which France, of course, under its new president, will bring its own emphasis.”  “But we are talking about two sides of the same coin,” she added, “progress is only achievable via solid finances plus growth.” Speaking about Hollande she said that he “will be welcomed with open arms here in Germany” and that the two will “work together well and intensively.”

 Hollande’s rhetorical preference for growth-enhancing measures has provided a rallying point for those in Europe who see strict austerity as a self-defeating strategy that is doing more harm than good to heavily indebted countries by slashing their growth prospects. The socialist’s victory came shortly after the collapse of the government coalition in Holland for failing to agree on a deficit reduction package, and was followed by parliamentary elections in Greece, which saw the clear defeat of the two main political parties, that had been advocates of austerity, in favor of more radical and anti-European factions.

 Merkel’s direct opponent, the German Social Democratic party’s chairman Sigmar Gabriel, picked up on the issue by stating on Monday that Hollande’s victory showed that “the politics of Angela Merkel and Nicolas Sarkozy led Europe deeper into crisis.” He went on to say that the results in France will “finally help Europe to go in another direction.” Nevertheless, he did not go as far as negating the importance of austerity and was quick in adding that “no one wants to do away with the fiscal pact.”

Leaders in Italy and Spain have been more cautious. Spanish premier Mariano Rajoy said in a statement that “austerity is not Merkel’s, it’s of the entire EU”. This has led to speculation about him becoming the German Chancellor’s next closest partner within the Union, should a Franco-German rift occur.  Italian Prime Minister Mario Monti went further by saying that “responsible public finances are a necessary condition, but certainly not sufficient for the key objective: sustainable growth that creates employment and is oriented towards social equality.” “For this reason,” he added, “it is fundamentally important that Europe urgently adopts concrete policies for growth.”

The results of the French election have also had repercussions on the political discussion in Washington. While the White House has avoided commenting directly on the issue citing the need not to interfere with other countries’ policy choices, many Democrats in Congress argue that developments in France validate the administration’s economic strategy and undermine calls made by Congressional Republicans to reign in out-of-control government debt through cuts in public spending and entitlement programs. In the words of Treasury Secretary Timothy Geithner at a congressional hearing in March and reiterated in many occasions ever since: “ if every time economic growth disappoints, governments are forced to cut spending and raise taxes immediately to make up for the impact of weaker growth on deficits, this would risk a self-reinforcing negative spiral of growth-killing austerity.”  At the same time, an economic debacle in Europe would likely be harmful to Democratic electoral chances in November, since it would almost surely have a negative impact on the U.S. economy.

 While some of the policies advocated by the newly–elected Hollande would be unthinkable in the U.S. context, such as increasing the tax rate for the wealthy to over 70% or imposing a tax on financial transactions, some feel that the main idea behind his new approach towards recovery is shared by an increasing portion of American voters. Republicans, to the contrary, were very critical of the changes put forward by the new French leader, and pointed at government profligacy and increased spending as the root cause of the debit crisis. Republican Representative Tom Cole talked about Hollande’s proposals as “playing into your popular delusion about what’s going to be necessary going forward.” Referring to the outcome of the French vote, he stated that “it does suggest that populist politics and class warfare work, and I’m afraid some people in this country would draw that lesson …”

Most analysts expect Mr. Hollande to soften some of his demands concerning European fiscal governance, and to settle for a compromise that would include attaching a protocol on growth measures to the Fiscal Compact without renegotiating the terms of the treaty.

It will be interesting to see how Hollande responds the immediate crisis in Greece, where European leaders will need to make an early decision on whether to stand by the terms of the Greek bailout or mitigate them to preserve Greece’s place in the Eurozone. Financial Times’ Gideon Rachman sees this issue as a key indicator of how Hollande will behave.

Similarly, it has been suggested that Hollande may be willing to forego his early insistence on European common bonds and accept the idea, more likely to be approved by Germans, of project bonds by the ECB that would allow the financing of specific infrastructure projects, along with enhanced lending from the European Investment Bank.

According to Mark Hallerberg, director of the Fiscal governance Center at the Hertie School of Governance in Berlin, coordinated fiscal stimulus, advocated by Hollande, is improbable. “Action from the European Central Bank, however, seems more likely.” “Euro bonds are a red line;” Mr. Hallerberg said, “quantitative easing much less so.” “There will be a bit of inflation, and there will be some pay increases,” he predicted. This view was confirmed in part by Finance Minister Wolfgang Schäuble when he stated in an interview that “these wage increases also have the effect of reducing the imbalances within Europe.”

The relationship between France and Germany is judged to be too important for Hollande to jeopardize it over this issue. But the contours of the expected rapprochement will likely have to wait until after the French Parliamentary elections next month, and for the full impact of this weekend’s stinging electoral defeat handed Chancellor Merkel’s CDU party by the Social Democrats and the Greens in Germany’s most populous state, North Rhine-Westphalia, to be felt.