Market Turmoil To Follow Greek Elections

And the first big challenge for the Hollande-Monti pact will dawn tomorrow. The markets are likely to be in turmoil — not from the French presidential result but from the Greek elections. There, the political dynamic has shifted dramatically once again, with both the main parties hit hard. Together, they have only 35 percent of the vote. A majority elected are opposed to the bail-out conditions.

The Hollande-Monti Pact: Growth Over Austerity

Exit polls suggest at the time of writing that Nicolas Sarkozy has suffered the ignominy of being a one-term French president. His loss means that for the first time in nearly a quarter of a century the French have elected a Socialist as their leader.

The result looks like it will be closer than many thought it was going to be a couple of weeks ago. Sarkozy’s rather brutal anti-Muslim appeal to the far right seems to have been rewarded with a narrower defeat. It appears the Socialist François Hollande has secured 52 percent of the vote compared to 48 percent for incumbent Sarkozy – a solid victory. And as I write, Sarkozy has conceded.

Sarkozy is only the second president, after Valéry Giscard d’Estaing, in 1981, to fail to win re-election under the Fifth Republic.

His supporters are now suggesting that this was an “unwinnable election.” That he was unfortunate in his timing: he entered office as the financial crash hit. Does this mean that no  incumbent can expect to win in the current circumstances? He is, after all, the 11th government leader to be swept from office since the financial crash struck. Does this French election hold a warning for Barack Obama?

Four percent is not a heavy defeat. While Sarkozy faced an uphill battle and was associated for many of the French with four years of crisis, the seeds for his defeat also rest with the manner of his governing. The French tend to appreciate a discreet president and Sarkozy was anything but: he chose to celebrate his victory at one of Paris’ most expensive restaurants and for several days after relaxed on a friendly billionaire’s yacht – one sporting the British Red Ensign!

As the living standards of the French dropped during his time in office and unemployment rose, the brash Sarkozy continued to project himself as a contemporary JFK, surrounding himself with beautiful women – not just his wife – and was happy to appreciate being associated with the finer things in life.

Many, I suspect, did not forgive him for this and as they went to the polls they recorded their resentment.

This marks him out from Obama. Sarkozy seemed distant from the pain. Obama doesn’t — although he doesn’t have the Bill Clinton gift of actually appearing to feel the pain. That, though, may save him come November.

There will clearly be Europe-wide consequences from this election. As far as Europe is concerned it is likely to shift the focus from austerity to growth and sets up a possible confrontation between Hollande and German Chancellor Angela Merkel.

The Economist this weekend suggested that Hollande may be rather dangerous, suggesting that he will turn the clock back to the early disastrous days of his Socialist predecessor François Mitterrand. Certainly, Hollande will be less business friendly than Sarkozy and this could well impact the growth he says he wants. But he is a sophisticated and cautious political player and some of his campaign rhetoric should be taken as just that.

Merkel was already indicating on the eve of the French presidential election that she would be open to re-thinking on the austerity-tilted European fiscal pact. She has come under strong lobbying pressure from Italy’s Mario Monti to do so.

Now that Hollande has won that pressure will simply grow on her — and with both the French and Italian leaders arguing for the pact to reflect more of a mix of reform, austerity and growth, she is likely to have to concede and sell it to the Germans.

How the bond and financial markets react is another matter. We shall have more hints on that tomorrow when they open.