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Hollande will travel to Berlin for a meet and greet with Merkel after he is sworn in later this week. His election means that France will perform an about-face on attempting to bring the budget under control and reverse Sarkozy’s labor law reform, making it once again virtually impossible to fire anyone. Hollande has promised to pay for any new spending he proposes, but he plans to do it by eliminating tax breaks for business and raising taxes on “the rich.” He plans a “75% tax rate on income above 1 million euros a year and a 45 percent upper tax rate for those earning over 150,000 euros. He would limit executive pay at state-owned companies to 20 times the lowest wage, cut the presidential salary by 30 percent and index the country’s minimum wage to economic growth.”
His plans call for 20 billion euros in new spending over five years, and he wants to “hire 60,000 more educators over his term and 1,000 police a year, and create 150,000 state-aided jobs to tackle youth unemployment.” He says his tax hikes will bring in an extra 29 billion euros while limiting the growth of government spending to 1.1% a year.
And the French voters bought it all. Unfortunately for Hollande, wealthy Frenchmen are already making plans to leave the country and avoid the socialist penalty for being successful.
It is Hollande’s demand that the EU fiscal compact be “renegotiated” where he will clash with Merkel. He wants to include provisions for “jobs and growth” in the compact, which sets strict guidelines for the budgets of member states, as well as deficit targets that must be met. Merkel has already said she has no intention of reopening negotiations on the pact, and their meeting this week will no doubt be much frostier than her consultations with Sarkozy.
Given the near certainty that Greece will exit the euro zone in the coming months, can the two leaders cooperate in inoculating the rest of Europe from the contagion of a Greek default? Thankfully, Merkozy worked to strengthen the European Central bank against such an eventuality by creating a 700 billion euro emergency fund to shore up shaky banks and loosening restrictions on the ECB’s ability to buy government bonds. These measures should see the EU through a Greek default, but it is an open question whether further erosion in Spain or France can be so easily dealt with.
Meanwhile, Greece is in chaos. The radical socialist Alexis Tsipras, whose SYRIZA party finished a surprising second in the May 6 elections, has forcefully declined to participate in a coalition government with the traditional socialist party PASOK and the New Democracy party who negotiated the bailout deal with the EU and IMF last March. Tsipras campaigned on an anti-austerity, anti-bailout platform, referring to the painstakingly negotiated agreement with the EU, IMF, and ECB (the “troika”) as “blackmail.” He rejects the idea that Greece will exit the euro, believing that the troika is bluffing when they say there will be no bailout if Greece rejects the deficit targets and budget cuts to which the previous government agreed.
Tsipras’ obstinacy has led to a crisis as there is no way a governing coalition can be formed. Together, PASOK and New Democracy won only 40% of the seats in parliament. Most of the smaller parties also ran on an anti-bailout, anti-austerity platform and appear unwilling to join the mainstream parties in walking the plank to save Greece from default.
Greek President Karolos Papoulias has called for a meeting on Monday of the top three parties but Tsipras has already rejected the idea saying, “They’re asking for accomplices to austerity. We can’t take part in this crime.”
Tsipras has good reason to torpedo the talks. Polls show SYRIZA is likely to win an outright majority if negotiations fail and new elections are called for next month. But Tsipras may have overplayed his hand. His suggestion that the private bank accounts of Greek citizens should be used to support the Greek economy, as well as his total disregard for the possibility of default might scare enough voters that they would return to their traditional loyalties, voting for PASOK and New Democracy next month.
Although the EU has been planning for a default by Greece, the shock of a member state leaving the euro zone will probably not help shaky banks, or government bond sales going forward. And the complex nature of Greece returning to the drachma as currency has many unknowns to which the EU will have to cope.
But if Greek voters prefer default and even more chaos to an austerity program with at least the promise of emerging from economic stagnation some day, they may give Tsipras what he wants — a majority of radical socialists for a government and economic pain that will make austerity look good by comparison.
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