Despite Hollande's ambiguous and, in some cases, dubious plans for managing the French economy, he was elected not just as an anti-Sarkozy vote, but because he talks a lot about European growth. In some ways, his timing couldn't be better. When the eurozone crisis broke last fall, the Franco-German crisis response was to push through an austerity package; but spending cuts have further undermined growth in several European economies, prompting a clamor for a more stimulative approach. Hollande hopes to seize the moment and frame himself as a champion of growth. He has three ideas for how to do this, one of which -- tapping the funds of the European Investment Bank to promote growth -- is supported almost unanimously by EU leaders, including those in Germany.
Hollande's other two ideas are more unpalatable to Germany. First, he wants to create Eurobonds, "not to pool debts but to finance industrial infrastructure projects." Merkel's problem with this is that if all national debt becomes eurozone debt, Germany will essentially pay in a more direct way for Greek and Spanish economic woes. Most observers agree that this is what ultimately needs to happen if the European Union achieves its goal of becoming more than just a currency union. The question is not if, but when. No German politician, including Merkel, who faces reelection in 2013, wants to talk about the subject without other fiscal checks and balances in place. But additional fiscal checks seem increasingly unlikely, given nationalistic sentiments rising across Europe. So while Hollande might be able to put positive pressure on Merkel to be more aggressive in figuring out the various avenues with which to pursue Eurobonds (already think tanks and central banks are putting forth proposals), he can't create them alone. Merkel, with Germany's deep pockets, still holds all the cards.
Hollande also wants the ECB to go beyond lending to banks, as it did last winter, and to lend directly to governments. The goal, similar to that of the Eurobonds, would be to ease the debt burdens of sick European economies. The danger is that such a move would inevitably force politics onto the ECB. In various speeches, ECB board members fall back on the idea that EU legislation clearly rules out the ECB's bailout of governments. But as Europe's weak markets have shown, the ECB's bank bailouts haven't addressed the structural economic problems behind the eurozone crisis. Though Europe's leaders could revise the ECB's mandate, as Hollande desires, the world has watched Germany skitter around this option -- in large part due to its own domestic political concerns that remain fully relevant today.
In the beginning of his presidency, Hollande will be determined to "save face," which will likely lead to a lot of hot rhetoric -- and he may yet block Germany's pick to lead the group that runs the currency union, German Finance Minister Wolfgang Schaeuble. But markets should also be reassured on a few counts. First, after Greece's recent election, which resulted in more anti-European politicians, Merkel and Hollande are at least on the same side of the broader European debate. Second, Hollande will have his hands full at home -- with the rise of the anti-immigrant extreme right, and high unemployment, particularly among France's youth, and with a business community vigorously opposed to more debt downgrades. This crowded agenda will continuously divert him from picking unnecessary fights with Merkel. At best, Hollande's opposition to German austerity could even be channeled into productive compromises, with Germany still having the upper hand.
