This is our last briefing before Sunday’s elections in France, where Francois Hollande remains the clear favourite to become the first Socialist president after Francois Mitterrand. Yesterday’s big news was the declaration of Modem leader Francois Bayrou, who said he would vote for Hollande, Le Figaro reports, which marks a further setback for Nicolas Sarkozy. Bayrou said it was his personal choice and he did note appeal to the 9.13% of the French who had voted for him in the first round to follow his lead. Nevertheless people around Sarkozy were furious since there is a strong likelihood that Bayrou’s choice will influence at least some of his voters and cement Hollande’s lead.

 

However some of the polls suggest that the gap between Sarkozy and Hollande has been tighenting. Two opinion polls, from BVA on May 4, and OpinionWay on May 3, had results of Hollande 47.5%, Sarkozy 52.5%, while TNS-Sofres had Hollande leading Sarkozy by 7pp (53.5/46.5). It is hard to depict any trend from the data, though the BVA and OpinionWay polls show the narrowest outcome since the beginning of the campaign. The polls were all conducted before Bayrou’s declaration yesterday. According to initially polling, Hollande is thought to have performed better during the televised debate.

 

Philip Stephens on Francois Hollande

 

 

Philip Stephens has picked up on last week’s editorial of the Economist, which had a cover story on the “dangerous” Mr Hollande. Stephens makes the point that there is nothing dangerous about Mr Hollande, or any other more or a less centrist politician standing for office in Europe. He says European democracy has a new organising principle. Citizens may change their leaders from time to time, but only as long as they don’t change direction. Stephens says the rise of the extreme right and left in France means nothing, except that it serves as a reminder that extremists are on the rise in times of depression.

(The question we would pose: what happens if the recessions/depression take an unusually long time, which is something you might expect after a financial crisis of such gigantic proportions?)

 

Merkel says she looks forward to working with Hollande

Angela Merkel claims that she is looking forward to working together with Hollande, Süddeutsche Zeitung writes in its leading front page story. According to the paper, advisors and diplomats close to the socialist candidate have sought to downplay fears that Hollande would be confrontational and risk a break in the close Franco-German relations. SZ quotes from protocols it has seen according to which Hollande is looking for a “pragmatic solution” in his demand to renegotiate the fiscal pact. Hollande’s advisors have already worked out proposals how to complement the pact in order to enhance growth which they want to show Merkel as soon as he is elected so that the additions could be agreed at the next EU summit in June. Hollande’s advisors also reassured the Merkel team that the new president would stick a responsible fiscal policy and abide to his goal to present a deficit of 3.0% of GDP by 2013. Hollande is conscious, according to the protocol that he will have to tell the French “hard truths at the very beginning of his mandate”.

 

Will France be another Italy, Süddeutsche Zeitung asks

In a separate story in the economics section, Süddeutsche Zeitung writes about the fragile economic and fiscal situation in France under the headline “Will France be another Italy?” The paper quotes bank analysts who are downbeat because of the fragile public finances, the loss of competitiveness, weak growth and a potential downgrade.

 

Mario Draghi calls for a ten year strategy

This sounds good, but we are still not entirely clear what he means. Mario Draghi called on government to present a 10-year strategic plan for the eurozone. Speaking at the ECB’s out-of-town junket in Barcelona, where nothing was substance was decided or uttered in public, Draghi said the fiscal pact can only be a starting point in bring the member states of the eurozone closer together. He said the world needed “clarity of vision for the next 10 years”, according to El Pais, something similar to three-stage process in the 1990s which led to the adoption of the euro.

 

Otherwise, he was non-committal on policy. He left the door open for further unconventional measures, and said the majority were against exiting right now. He stuck to the ECB’s view that the economy would improve in the second half.

 

Fitch presents the full bifurcation scenarios

This story fits in nicely with Draghi’s ten-year strategy. Fitch has drawn up a massively complex bifurcation chart, showing what will happen to the eurozone in various scenarios. The whole table is too complex to reproduce, but you can find it on FT Alphaville.  The scenarios include a Greek exit – orderly and disorderly varieties, a quasi-fiscal union, a German/core exit, a full political union, and a full break-up. (Draghi’s 10-year plan would have the advantage that it would narrow down some of these wild scenarios. This is also why Angela Merkel’s short term strategy is so dangerous.)

 

Historic popularity low for liberal FDP chairman

Ahead of next Sunday’s state election in Schleswig-Holstein and election in Germany’s most populous state Northrhine-Westphalia the liberal FDP party chairman Phililpp Rösler hit a historic low in his popularity ratings, Spiegel Online reports. Only 16% of the Germans still believe that the party boss and economics minister is doing a good job. His survival at the party’s head and possibly the stability of Angela Merkel’s coalition in Berlin will crucially depend whether the FDP will pass the 5% threshold in both elections, which is not certain.

 

Samaras steps up rhetoric in last days of campaigning

New Democracy leader Antonis Samaras toughened his language regarding illegal immigrants and right-wing parties on Thursday as he made his penultimate campaign speech in Athens, during which he said that Greece would enter a period of “instability” if voters do not give the conservatives a clear majority on Sunday, Kathimerini reports. About the three parties on the right, Popular Orthodox Rally (LAOS) and Chrysi Avgi, all of which opposed the bailout programme, Samaras said  “They are water carriers for PASOK, they have nothing to offer, they simply put obstacles in the way of us achieving a strong popular mandate… they promise paradise with material from hell. They are devils” The ND leader insisted that forming a coalition government with PASOK after the elections was not an option worth considering.

 

Austria agrees a national stability pact

In Austria, the federal government and the Länder finally agreed on a federal stability pact including a sanction mechanism, a weaker version of the EU blueprint, Der Standard reports. The pact is to ensure that all contribute to the efforts to save €5.2bn to reach a balanced budget by 2016 and to reduce the debt level thereafter. Länder who repetitively violate the pact risk losing the solidarity of the community. If Länder or communities fail the deficit target in two consecutive years, it triggers the sanction mechanism to be agreed unanimously by a committee with representatives of federal, Länder and local communities.

 

Martin Wolf on credibility

Martin Wolf’s column is about the UK, but it is just as relevant for the eurozone. He says what he learned from 1992 was that credibility collapses when everybody thinks that the pain policymakers inflict is ultimately not sustainable. The same holds now for the policies of austerity.

 

“Yet the fiscal squeeze has barely begun. According to the Office of Budgetary Responsibility, net borrowing fell by just 1.8 per cent of GDP between 2009-10, just before the coalition government came into office, and 2011-12. A further tightening of 7.2 per cent of GDP is due by 2016-17. The assumption that this will coincide with economic expansion is, in today’s economic conditions, bordering on the heroic.”

 

(You could say the same about Spain. The current policies are consistent with a decade of economic depression.)

 

 

Seamus Coffey on the debt reduction rule

There is, understandably, a big discussion in Ireland about the technical aspects of the fiscal pact, including about whether it will require additional fiscal consolidation in the future. Seamus Coffey, writing in the Irish economy blog, has a very use article that explains how the rule works in practice (including the formula use to determine compliance with the 1/20 debt reduction rule). He comes to the conclusion that Irish economic forecast would keep Ireland strictly on a path that is compliant with the framework of the rule, and indeed Ireland may reduce its debt faster than the rule suggests. (We would caution against this assessment as it depends crucially on relative optimistic growth assumptions. If these are not met, the debt reduction rule still kicks in.)

 

 

John McHale on monetary vs fiscal

Writing in the Irish economy blog, John McHale argues that monetary policy are more effective than fiscal policies in dealing with the recession. He advocates an increase in the ECB’s inflation target of 4%.

 

“While there are downsides, this revised target could accomplish a number of things: (i) with a clear mandate to achieve this single target, it is compatible with a reasonable definition of price stability;

(ii) it would allow for lower real interest rates, thereby boosting interest-sensitive spending;

(iii) given inevitable nominal rigidities, it would allow for a more feasible route to real exchange rate depreciations in the periphery relative to the core;

(iv) it should lead to a nominal depreciation of the euro, allowing further  trade-weighted real depreciation for the periphery;

(v) it would help ease real debt burdens;

and (vi) it would help ease the overall euro zone budget constraint through higher seigniorage revenues.”

 

 

Ryan Avent says austerity also bad for integration

 

This is a wise comment by Ryan Avent, hat tip Paul Krugman. Avent mades the point that one should step away from the country-level perspective, and look at the eurozone as a whole. The picture that emerges then is not pretty:

 

“I think the reaction to Mr Hollande’s success is telling. The overwhelming criticism is a sort of ‘look how inappropriate fiscal expansion would be for the French economy’ take. The point is that the economy that matters is that of the euro zone as a whole. And when one steps back and looks at the dynamics in play, it becomes clear that the robotic push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the crisis.”

 

 

 

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Sideways.

10-year spreads
	Previous day	Yesterday
France	1.358	1.304
Italy	3.938	#VALUE!
Spain	4.253	4.188
Portugal	9.093	9.225
Greece	18.931	18.967
Ireland	5.261	5.224
Belgium	1.819	1.734
Bund Yield	1.615	1.614
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.316	1.315
Yen	105.560	105.44
Pound	0.813	0.8122
Swiss Franc	1.201	1.2013
ZC Inflation Swaps
	previous	last close
1 yr	1.82	1.86
2 yr	1.82	1.81
5 yr	1.8	1.8
10 yr	2.06	2.06
Euribor-OIS Spread
	previous	last close
1 Week	-7.114	-7.014
1 Month
3 Months
1 Year
Source: Reuters