"Merkozy" is what the press dubbed the symbolic marriage of fortune between German Chancellor Angela Merkel and French President Nicolas Sarkozy, describing their efforts to hold Europe together through economic crisis. Now a new portmanteau has been coined, mashing the names -- and pessimistically describing the relationship -- between Merkel and France's new socialist president, Francois Hollande, as "Merde."
On May 16th, when Hollande is inaugurated, he will be only the second socialist to run the country since World War II. His promises are bold and disruptive -- including restoring France's budget by taxing the rich and reducing unemployment by hiring more government workers. This deeply worries the 48% of the French voters who cast a ballot for Sarkozy, or those who protested both candidates by refusing to vote at all. Markets, by contrast, seemed more troubled by Hollande's plans on another front -- his promises to lead a "New Europe." "Germany doesn't decide for all of Europe," Hollande proclaimed on the campaign trail. A major element of his campaign narrative has been to fight against German austerity on behalf of Europe's beleaguered economies. He has even asserted that his first French presidential trip will be to Berlin, to "renegotiate" the fiscal compact that took "Merkozy" so long to pass.
Merkel, who offered to help Sarkozy campaign to avoid this uncomfortable meeting, will have her hands full over the next few months. Hollande knows he has a lot to prove. But what he's about to learn is that no matter his posturing, Germany still holds much of the power. Germany's economy remains significantly healthier than France's, and Merkel's approval ratings are high. Though her austerity programs are now in question, she's been quick to shift her own rhetoric to a "growth compact." Some flexibility with respect to austerity may actually be healthy for Europe -- certain countries, like Spain, have economic woes driven more by housing prices than national debt, and could desperately used a shift in focus toward growth. At the same time, however, some form of budget discipline appears to be the only sane path forward if the European experiment is to succeed. Politically, that's an easy stand to take for Merkel. It will be harder for Hollande.
Hollande's hair may yet go whiter than Barack Obama's as he begins to collect experience in France's national government. First, though he promised that France will hit the 3% deficit target in the EU's fiscal compact in 2013 and will achieve a balanced budget by 2017, he hasn't explained how he will do this. Meanwhile, France's public debt, the amount of money borrowed by the French government to pay its bills, is projected to reach 90% of GDP by 2013. This is the year that Hollande says France will return to strong growth. But particularly with the U.K. and Spain in a double-dip recession, most economic forecasts aren't as rosy as Hollande's.
Locked into the euro alongside Germany, Hollande's main goal, if he wants to lead Europe and preserve the best parts of France's social model, should be to increase French competitiveness. Again, he has yet to lay out a specific plan. Although worker productivity is similar in Germany and France, the French export market is among the weakest in Europe. Further, France's generous welfare state has led to a dysfunctional labor market, where excessive protection by labor unions and state laws make it hard for incompetent workers to be fired -- and mean that even those who are fired wind up getting paid off handsomely by either their company, the state, or in some cases both. Hollande's idea to rollback the retirement age to 60, after Sarkozy pushed it to 62 in one of his only meaningful attempts at structural reform, seems wildly out of touch.
