If Hollande wins French election, Europe won't collapse – just shift a bit

Last night, most of France watched presidential incumbent Nicolas Sarkozy and challenger François Hollande battle it out in the big debate before Sunday’s vote. Europe, and arguably, the world, will be watching to see who comes out ahead when the two men face off in a run-off election May 6.

Socialist Hollande – who is ahead in the polls and favored as France’s next president – is not happy with the austerity economics preached by the more conservative Mr. Sarkozy and his like-minded German partner, Chancellor Angela Merkel. Those policies may have helped calm the financial markets and bolstered the euro as one indebted country after another has faltered – but they’ve also brought out street protests and slowed economic growth.

Conventional wisdom foresees a battle royale between France and Germany should Mr. Hollande win. But I expect something more like a subtle adjustment.

True, conditions seem set for confrontation in a Europe divided into two camps: the jailers and the bailers. The bailers want the European Central Bank, ultimately Germany, to stimulate growth and bail out ailing Latin Europe. The jailers, led by Germany, want to impose strict austerity until Club Med reforms.

The election of Hollande would be the first tangible result of a popular uprising against the reigning forces in Europe that preach pain before gain. According to this view, a weakened, yet stubborn Chancellor Merkel would be home alone in Berlin, still unwilling to unlock the shackles of her poor Latin brethren. The result, many believe, is likely to be policy gridlock, market turmoil, and a new and dangerous phase of the euro crisis.

It is certainly true a Hollande presidency would challenge the certainties of the German-led northern European camp. But the consequence of fresh tensions will not be mud wrestling and policy gridlock. Rather, Europe is likely to see a gradual political rebalancing after an extended reign of national leaders from the center right.

Why? Because the markets will keep François Hollande in check while he keeps Angela Merkel in check. In the end, it all sounds a lot like what the French call cohabitation and the Germans call grand coalition – a collaboration of the major political forces, only this time on a European level.

Hollande would lead a country that was recently stripped of its coveted AAA status. France has lost 500,000 industrial jobs over the last decade. As a consequence of its shrinking export sector, its current account deficit is reaching record levels. While the country’s competitive position has been deteriorating, unemployment is rising, hovering around 10 percent. The country’s debt-to-GDP ratio is just shy of the 90 percent that economists consider dangerous.

Hollande wants to use the state to combat these ills. But already, the state consumes 56 percent of gross domestic product. Yet Hollande proposes to increase that ratio further by increasing taxes. He will certainly need new revenue, and lots of it, to pay for his reforms which the German magazine Der Spiegel mockingly calls “superhits of the eighties”: hire 60,000 new teachers and 5,000 police officers, lower the pension age from 62 to 60, and keep the 35-hour work week. At the same time, Hollande pledges to meet the European Union budget rules by 2013.

Something will have to give. And somebody will need to tell Hollande. But it does not need to be Chancellor Angela, the disciplinarian from Berlin. She can sit back and let Germany’s best ally do its job: the markets.

Hollande might well find the experience of one of his predecessors valuable. When François Mitterrand came into office in 1981, he borrowed to stimulate the economy. That effort failed quickly, and François the Socialist became François the pragmatist for the rest of his presidency.

That Hollande has limited room to maneuver does not mean he would not get some of what he wants, at least initially. In fact, he has already gained quite a bit of leverage, especially in Berlin.

During his campaign, the opposition German Social Democrats rediscovered the merits of transnational politics. They conditioned their parliamentary support for Merkel’s eurozone bailout proposals on the inclusion of language that Hollande used in France. Now, they hope to postpone the German parliament’s vote on a new  European fiscal pact until Hollande makes his position clear. If German Social Democrats and French Socialists play their cards right, Hollande would practically have a seat at the table of power in Berlin.

Angela Merkel knows this. She is a master tactician, and she understands the value of the euro to her country and to her own legacy. She will be ready to compromise. Last week she preemptively engaged in a rhetorical growth blitz to accommodate a possible Hollande victory.

At the European Council meeting in June, she announced, a growth initiative shall be introduced. Rumors price it at 200 billion euros. However, it will not be the type of package that the neo-Keynsian prompters suggest: no stimulative bonfire that increases debt and increases the need for structural reform. Rather, the plan calls for mobilizing unused EU funds, an expanded capital base for the European Investment Bank, and some new infrastructure projects.

The French-German engine has traditionally powered the European Union because it was able to engineer compromise across national borders and across ideological barriers.

In fact, the French and the Germans collaborated best when their leaders hailed from different political camps: take Helmut Schmidt and Valéry Giscard d’Estaing, or Helmut Kohl and Mitterrand, or Gerhard Schröder and Jacques Chirac.

They forged alliances on war and peace, on the single market, on German unification, and the common currency. It is this tradition that Chancellor Merkel and a possible President Hollande will seek to be part of.

Thomas Kleine-Brockhoff is a senior transatlantic fellow at the German Marshall Fund of the United States in Washington, D.C.