Should we fear President Hollande?

France got a new President and he is a socialist. Last time this happened was with Francois Mitterrand and he almost wrecked the French economy. Today Europe is in such a fragile state it is not just France that is in the danger zone if this President proves to be another Mitterrand.

How dangerous is he to the European Economy? Let’s look at the market, that’s what they are best at, evaluating risk. First we should note that Hollande has been the likely next president for a long time, so the effect we will see today will be that of a ‘very probable thing’ turning in to a ‘sure thing’. Still the effect has been clear, the Euro is down the stock markets around Europe are down even more, reflecting their expectations of this President being bad news for the European economy.

More worryingly bond yields in the European periphery are up, meaning the election results have made it more costly for them to borrow. Since high yields are the main reason for Europe’s current debt crisis this is indeed worrisome.

The thing that got the markets so worried is Francois Hollande’s promise to shift Europe away from austerity to growth. This is something I can partly agree with, Europe needs to do a lot more to encourage growth and some better off countries like Germany are too focused on austerity. The problem is that when I talk of encouraging growth, I mean liberalization, deregulation and privatization of the European economies, as productivity rises this should also boost growth. Given Mr. Hollande’s solid left wing credential I would guess that this is not what he means when he talks of promoting growth, he means increased government spending. More spending means larger deficits which in turn means higher bond yields and if bond yields rise high enough countries can’t pay for their own debt and we have a debt crisis.