Markets, Germany wary as Hollande wins in France

PARIS Mon May 7, 2012 5:14pm EDT

1 of 20. France's newly-elected President Francois Hollande waves from a balcony at his campaign headquarters in Paris May 7, 2012, the day after his election.

Credit: Reuters/Eric Gaillard

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PARIS (Reuters) - Francois Hollande's election as French president was greeted by jitters on European markets and a dour front in Berlin where ruling conservatives warned the Socialist on Monday that Germans were not ready to pay for his promises of an end to austerity.

With investors spooked by Greek voters' rejection of parties which slashed budgets to secure an EU/IMF bailout, festivities in Paris after Hollande defeated centre-right incumbent Nicolas Sarkozy on Sunday soon gave way to a grim sense of getting down to the business of dealing with Europe's deep economic crisis.

Hollande spent the day closeted with aides who said they reviewed how he may pitch "the priority for growth in Europe" to Chancellor Angela Merkel. They will meet for the first time next week in Berlin to relaunch the Franco-German partnership that lies at the heart of the European Union and the euro currency.

"I must prepare myself," said Hollande, who has never been a minister and is little known outside France. "I said that I was ready and now I must make sure I am, completely."

His campaign chief Pierre Moscovici said the president-elect discussed how to present his plan to pull troops out of Afghanistan this year, as well as the economic growth strategy.

A promise of a welcome with "open arms" in Berlin could not conceal unease among Merkel's Christian Democrats about what Hollande's centre-left campaign pledges of growth and state spending mean for efforts to contain deficits in a euro zone that is struggling to compete in a world of new economic powers.

"Germany is not here to finance French election promises," said Merkel's parliamentary party leader Volker Kauder.

Hollande's chief economic adviser insisted he was not about to simply "hand out money" and planned to balance the books.

OBAMA INVITE

Moscovici would not discuss what demands and compromises Hollande could offer Merkel on May 16, saying only that both parties were conscious of the need to find common ground.

Like other leaders in southern Europe, Hollande argues that cutting state deficits too hard and too fast may choke growth so far it makes the debt crisis even worse. Merkel repeated she would not renegotiate an EU pact on fiscal discipline, though she signaled some tactical shifts may be possible.

"We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis," she said. "But we are talking about two sides of the same coin - progress is only achievable via solid finances plus growth."

With other world powers also anxious that a prolonged slump in Europe does not drag down their own economies, and allies and adversaries eager to learn how Europe's second biggest economy and major military and diplomatic force will be run, Hollande is in demand, even before he formally replaces Sarkozy on May 15.

President Barack Obama invited him to meet in Washington before a NATO summit in Chicago on May 20. Hollande, who won a convincing 51.6 percent of the vote against Sarkozy, will also attend a summit of G8 leaders near Washington on May 18-19.

LIMITED OPTIONS

He must finalize his team of ministers by next week, as the pressure of nervous financial markets cuts short any hopes of a lengthy honeymoon in office. Polls make his Socialists and their allies favorites to replace Sarkozy's centre-right bloc as the majority in parliament at elections on June 10 and 17.

"Hollande has little room for maneuver. The goal has been fixed - reducing the deficit to overcome the debt crisis," said BNP Paribas analyst Bertrand Lamielle. "His room for maneuver is about how to do it, so we are waiting to see which measures he announces in his first political speech."

While Greece plunged into turmoil after the vote left a question mark over the country's future in the euro zone, France was calm, partly due to a public holiday on Tuesday.

Standard & Poor's, which cut France's triple-A rating in January, said Hollande's win did not impact Paris's creditworthiness although it would scrutinize his policy choices. There was at least a one-in-three chance of a cut to France's long-term rating within two years, it said.

Hollande - who will be the first Socialist president in 17 years - was deep in discussions all morning with aides Moscovici and Manuel Valls. The three were briefly joined by Jerome Cahuzac, who is tipped as a likely budget minister.

Hollande is widely expected to name Jean-Marc Ayrault, a German-speaking moderate who is Socialists' parliamentary leader, as prime minister and mix trusted older hands with younger talent when he unveils his cabinet next week.

Sarkozy's office said Hollande would be sworn in on May 15 and, in a gracious gesture, the outgoing leader invited the president-elect to join him at an annual ceremony on Tuesday, a national holiday, to commemorate the end of World War Two.

Hollande overcame an aggressive campaign by Sarkozy, who veered to the right in a chase for the votes of the nearly one in five electors who supported far-right anti-immigration candidate Marine Le Pen in the first round of the ballot.

Hollande, 57, was buoyed by the same tide of anger over the economic crisis that has felled 10 other European leaders and derailed Sarkozy's 2007 campaign promise to slash unemployment.

BALCONY APPEARANCE

But economists say he too will have to take early measures to rein in public spending and keep markets at bay, potentially disappointing his supporters.

Welfare spending swallows 28 percent of national income - more than any other rich, OECD country - and growth has averaged only 1.6 percent over the past 20 years, raising concerns over the sustainability of public finances as the population ages.

Hollande's aides say he will be a closet reformer, aided by backing from the left. But some commentators have bemoaned a dearth of structural reform proposals. And past attempts to reform the country's generous social model have triggered furious street protests that have thwarted change.

Monday's newspapers featured a beaming Hollande, arms outstretched, on their front pages. Left-leaning daily Liberation ran the headline "Normal!" a reference to the new president's homely image as a man of the people.

Hollande briefly appeared at the balcony of his campaign headquarters to wave at wellwishers gathered below, but devoted the bulk of the day to work as the turmoil in Greece sent the euro tumbling to a 3-month low with the dollar.

French stocks were firmer, however, and the risk premium investors charge for holding French 10-year bonds rather than safe-haven German Bunds was broadly unchanged at 120 basis points. It hit a high of 191 bps last November amid fears of a euro zone credit crunch.

"Hollande's victory has already been priced in by markets, however his promises made during the campaign have not been priced in, so there is risk on the downside if he stands his ground when he announces a first set of measures," said fund manager Christian Jimenez at Diamant Bleu Gestion in Paris.

"The words 'grace period' do not apply to the situation. That's the reality," said Michel Sapin, a former finance minister widely tipped to return to that job under Hollande, whom has been advising on economic affairs. "Nobody expects that we simply arrive in power and hand out money," Sapin said.

Hollande promises a zero deficit by 2017, a year later than Sarkozy promised, but analysts believe an over-inflated growth outlook makes both goals unrealistic without spending cuts. Economists say Hollande must quickly outline his domestic plans, likely to centre on a tax reform, and revise growth targets.

His plans to tweak a reform that raised the retirement age to 62 and increase the minimum wage are unsettling investors who fear France could drift away from the club of trusted northern European borrowers and towards the debt-laden periphery.

The rest of his cabinet is likely to feature veterans like Laurent Fabius, a prime minister under President Francois Mitterrand, along with younger faces and women.

(Additional reporting by Brian Love, Daniel Flynn, John Irish, Elizabeth Pineau, Sybille de la Hamaide Geert De Clercq and Alexandria Sage; Writing by Daniel Flynn and Catherine Bremer; Editing by Alastair Macdonald)

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