The French President-elect, François Hollande, received a double warning from markets and Berlin yesterday after promising to end the "all-austerity" approach to the European financial crisis.
Mr Hollande scarcely had a chance to savour his victory in Sunday's presidential election before jittery markets and a seemingly inflexible statement from Germany reminded him of obstacles to his proposed new European agenda for "hope" and "growth".
France's first Socialist President since 1995 will visit the German Chancellor Angela Merkel to outline his growth plans next Wednesday, the day after his inauguration in Paris.
Ms Merkel said yesterday that she expects to work "intensively and well" with Mr Hollande after he defeated her close ally Nicolas Sarkozy by 51.6 per cent to 48.4 per cent in the second round of the presidential election. However, Chancellor Merkel's spokesman appeared to slam the door to any "renegotiation" of the EU treaty on fiscal discipline finalised in Brussels in March. A reopening of this treaty, to add a protocol on capital spending to promote growth, was one of the main planks of Mr Hollande's campaign. The Chancellor's spokesman, Steffen Seibert, said: "It is not possible to renegotiate the budgetary pact which has already been signed by 25 out of 27 EU countries."
A head-on collision between Ms Merkel and Mr Hollande on this point can probably be avoided. The President-elect has already hinted that he might accept a compromise in which an untouched fiscal treaty would be balanced by a new text on policies to kick-start growth. He will send a letter outlining his ideas to all EU leaders in the next few days. The true confrontation with Berlin may come over the contents of any new growth treaty. Ms Merkel's spokesman said yesterday that "growth-promotion" should mean labour-market reforms on the German model, not "deficit spending".
Amongst other things, Mr Hollande wants the European Central Bank to issue new multibillion-euro loans – or euro bonds – to fund Keynesian-style infrastructure programmes, such as rail, road and renewable energy projects. Several other European leaders favour this idea. Berlin is, so far, opposed.
The market jitters yesterday were, perhaps, more of an amber warning for Mr Hollande than an outright red light. Analysts said a slide in the value of the euro and an initial fall on stock markets were prompted more by the muddled outcome of the Greek election than fears of an Hollande presidency.
"For the next few weeks the direction of the stock market will ... hinge on how much effort all sides, mainly Chancellor Merkel and President Hollande, will be putting into trying to work together," said Markus Huber of the City trading firm ETX Capital.
In his victory speech on Sunday night, Mr Hollande said his election would allow the EU to abandon its present self-defeating, all-austerity policy. "In every capital, beyond the government, there are people who have found hope thanks to us, who are looking to us and want to put an end to austerity," he said.
The man who is likely to be Finance Minister in the first government of the Hollande era, Michel Sapin, said markets and other critics should not confuse the President-elect's approach with profligate spending. "Nobody expects that we simply arrive in power and hand out money," Mr Sapin said.
Mr Hollande has promised to reduce France's 5 per cent of GDP budget deficit to zero by 2017. He has outlined new taxes on the rich and plans to close tax loopholes for some businesses. He has been less clear about his plans to cut the 56 per cent of French GDP which goes on state spending.
He will attend his first semi-official engagement today when – at Mr Sarkozy's invitation – he accompanies the outgoing President at a ceremony to mark the anniversary of the end of the 1939-45 war in Europe.
Much of Mr Hollande's attention in the next few says will be focused on his choices for Prime Minister and other key posts in a new French government. The favourite to be Prime Minister is Jean-Marc Ayrault, 62, mayor of Nantes and head of the Socialist group in the National Assembly.
Initial opinion polls suggest that Mr Hollande should easily overturn the existing centre-right majority in the National Assembly in parliamentary elections on 10 and 17 June.
ECONOMISTS' VIEW: WHERE EUROPE GOES FROM HERE
Lord Oakeshott, former Liberal Democrat Treasury spokesman
"This is a historic victory for the forces of reform against reaction in Europe. Three times in the past three-quarters of a century – in 1936, 1981 and 2012 – the people of France have had the courage to vote for real change. Our Government should never have tried to prop up the corrupt, failed Sarkozy regime. Now we must work with President Hollande to put growth first in Europe and Britain. Yet more cuts are a cul-de-sac in any language or country."
Jim O'Neill, chairman of Goldman Sachs Asset Management
"We need to find out what Francois Hollande in reality is going to stand for. Does he really have his own strong, independent, views about tax policy and spending? How much is it about electioneering? Many people in European think-tanks think a lot of it is just noise. If you look at the underlying fiscal plans there's not a huge amount of difference.
I suspect that other European leaders might indirectly encourage him to be noisy about the fiscal compact as well as enjoy his berating of the European Central Bank. Two months ago that probably wouldn't have been the case. It's difficult to reach the conclusion that pursuing the degree of rigidity as narrowly implied by the new European "Fiscal Compact" makes a lot of sense.
If you look at the Italian and Spanish evidence, what is it really achieving? Obviously these countries have to combine greater fiscal discipline with sufficient supply-side reform to raise the longterm growth potential, but, remember: stick and carrot! It can't all be a stick."
Jonathan Portes, Director of the National Institute of Economic and Social Research
"Mr Hollande's programme reflects a better grasp of the realities facing the eurozone and I hope that it will change the dynamics of policy. Anything that the European Investment Bank could do in Italy and Spain would be useful. But beyond that they probably just need to slow the pace of consolidation.
Greece was exceptionally badly managed. To the extent that consolidation is achieved by collecting taxes from rich people who previously didn't pay their taxes, that's a good thing. To the extent it's achieved in other ways, less so."
David Blanchflower, professor of economics at Dartmouth College and former member of the Bank of England's Monetary Policy Committee
"Francois Hollande's victory will impact on the forthcoming Irish referendum on the fiscal pact and presents a huge impetus to anyone who thinks that they don't have to take this nonsense about austerity. What happens to the relationship between Hollande and Chancellor Merkel? She said one of the most idiotic things you can imagine about the fiscal compact which is: "This is not for renegotiation".
Has she ever heard of the ballot box? That's what Hollande's going to say. This is a fatal blow to the heart of that fiscal compact. It's dead. The best fix is for everyone else to kick the Germans out of the eurozone. Let's say the single currency splits, with Germany, Austria, the Netherlands and Finland going one way. Where does France go? France has to go with the other guys."Reuse content