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The Fate of the Eurozone Hangs on Sunday's French Elections

It now looks as though Nicolas Sarkozy's days are numbered. In the balance lies the fate of the Eurozone itself.

It appears Socialist Francois Hollande will win the French election runoff on Sunday and that June's legislative elections will give the Socialists a powerful position in France's parliament.

Added to these developments is the good chance that both the major existing parties in Greece's parliament, which had jointly agreed to the bailout deal, will be voted out of office on Sunday as well and replaced by a motley set of far-lefties.

So while the Eurozone has been quiet this week, the calm is deceptive with the elections on Sunday.

Meanwhile, most of the worry in the Eurozone centers on Spain – which is quite foolish.

Spain recently elected a center-right government with a large majority, which is clearing up the mess left by its predecessors. The country does have a 25% unemployment rate, but that's a function of Spanish labor law and excessive welfare payments, both of which the current government is addressing.

Spain's budget deficit is also smaller than France's, as is its debt level. In fact, Spain's debt and deficit burdens are lower than both Britain and the United States. Spain is not the issue.

Considerable Danger in the Eurozone

As for Greece, it is a shambles.

The truth is it should have been chucked out of the Eurozone two years ago, when it was first revealed that its governments had been consistently lying about its budget numbers.

Had that happened, the new drachma would have sunk to about a third of its former value, and Greek living standards would have reduced by half, all without anything but market forces to be blamed.

Now hundreds of billions of euros have been poured into the country, and its ungrateful electorate is determined to elect every nut-job it can rake up. The whole Greek rescue project has been a complete waste of time and money, and should be ended forthwith.

Fortunately, throwing Greece out of the Eurozone will not destroy the euro – after all, nobody was relying on the strength of the Greek economy in their calculations of the euro's value.

However, France is a different matter entirely.

Unlike Greece, if France gets into serious trouble, the remaining "solid" euro economies led by Germany are not big enough to save it.

And, led by Hollande, France looks to be in considerable danger.

Hollande wants to increase the top rate of tax to 75% and to reverse the one significant reform of the Sarkozy presidency – the raising of the retirement age from 60 to 62. Needless to say, in Germany, where the retirement age is 67, there will be little sympathy for France's predicament.

Hollande also objects to the emphasis on austerity in the bailout plans put together by the Eurozone leadership led by Sarkozy and German chancellor Angela Merkel.

So if France gets into trouble, the willingness of the German populace to put up yet more money for a further bailout looks doubtful, to say the least.

What's more, as I discussed last week, the brewing "Target-2" scandal has blown another hole in the euro.

As it turns out the foolish design of the "Target-2" euro payments system has left German taxpayers potentially liable for $800 billion, the amount of paper the German Bundesbank is holding from southern European central banks that may be forced to default.

This additional potential cost to German taxpayers is larger than the bailouts themselves and should cause a rebellion against another bailout "solution" – and rightly so.

German politicians, facing an election next year and seeing the fate of their Greek billions, will not dare push through yet another bailout if the call comes in from France.

The Euro's Days are Numbered as Well

At that point the euro will break up, with Greece leaving it altogether, defaulting on its debt and becoming a European Argentina without the resources. Spain and Italy will also leave the euro.

In Italy's case, this may also result on a default on the country's debt, since the debt is very large and the current government of EU-appointed "technocrats" will be thoroughly discredited.

In Spain's case, a modest devaluation from the euro's exchange rate may well prove sufficient to revitalize the economy without a default on the country's moderate debt, although the Spanish banking system's bad debts, left over from its real estate bubble, may yet sink it.

As for France, leaving the euro will not automatically bring debt default, but it will allow Hollande and the socialists to engage in an orgy of left-wing policies similar to those of Francois Mitterrand's first government from 1981-1983.

Given that France's debt position is already somewhat precarious and its government already far too large, that will bring a French debt default, but probably not for a year or two.

Germany, the Netherlands and Scandinavia, meanwhile, will do fine, although the new strength of their currencies, whether separate or still combined into a "strong euro" may in time make their industries somewhat uncompetitive. Still, their debt remains top quality and in general, if they continue pursuing sound policies, they will prosper.

As for U.S. prospects, the break-up of the euro won't affect much over the long term, although European debt defaults will draw unwelcome attention to the U.S. deficits and spiraling debt.

In the short term, however, European turbulence will inevitably have an adverse effect, both on the U.S. economy and on the stock market.

"Sell in May and go away" may never be better advice than this year, at least until we see how the Eurozone debt crisis pans out.

Sunday's French elections are going to be critical.

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Join the conversation. Click here to jump to comments…

  1. Alan Fox | May 4, 2012

    You failed to mention Ireladn in this Article, 3 of the PIIG countries will leave the Euro but you didnt include Ireland but nor did you include Ireland in the countries that will do fine?

    • akeem adedimeji | May 5, 2012

      You did missed the points, you seems to build up a case to support your views on Europe, and you tried to sound credible, and try to drum up a failure songs,

      But you miss the points,
      On Greece, can Greece really leave the Eurozone?
      Will anyone in Greece even try?So we want to leave! Ahh Fine! So the money we borrowed you, how will you pay'? So because you leave, we forget our money? So where will Greece go to borrow money to finance its govt'? FROM cHINA?
      No the Greks are stupid-
      2, Even if H

  2. Jefe McForum | May 4, 2012

    All interesting I'm sure, but I nearly stopped reading when I read about "Excessive Spanish Welfare Payments".

    They area fraction of the level in the UK and causing real hardship in the country.

  3. Chris Jones | May 4, 2012

    Spain is up to it´s neck in the brown stuff.

    Most Spanish banks are effectively bankrupt ,with Santander having over 750,000 repossessed properties on its books,all showing at pre crash values.!!!

    The only way out is a return to the pesetas,with an immediate devaluation of at least 30%.

  4. Joe - | May 4, 2012

    What Mr Martin H fails to note, however, is that 70% of the Euro population do not want to be governed or have anything to do with the crooks in Brussels.

    We just love the fact that Greece will default, and hopefully Spain, Italy, Ireland will follow very soon.

    Your analyses has a taint of – 'I know better' about it, when in fact you're right of the mark. The majority in the UK really do hope the whole sorry, corrupt system falls apart very soon.

    In fact, I have a bet on it, which I know I will win!

    Regards…. J

  5. SAMEER | May 4, 2012

    Dear Martin,

    Of late your analysis has not at all worked out well, six months back u gave a report and analysis on Silver and it bombed badly and even till date it has not recovered any of its losses.

    I am Scpetical about this current article as well, Francois Hollande if he wins will have to accept the realty of Euro zone and he is not in a position to impose his personal agenda on the Euro-Zone, istead he will try to maintain status quo and continue with the bailouts rather then try something adventrous in his early days .


  6. Bob | May 4, 2012

    you Americans don't understand Europe at all.
    When Hollande is elected, (almost) nothing will change in Europe.
    Especially, don't tell stories about socialism or communism, because you don't have the slightest idea what it represents. (I am conservative myself).
    Please limit yourself to unveal US situations. You have enough stuff for discussion there.

    A European.

  7. Werner | May 4, 2012

    The Euro's demise wont come as soon as you may predict it, Martin. Anglo-Saxons are bashing it for years now, and have oversold it constantly, just to get short squeezed. I am not a fan of the Euro either, but it apparently is not in a much worse situation than the USD and GBP are. Before we break out of the 1.30 – 1.35 trading range, not much will happen. I doubt that will come before some time. The only "gamble" I am committed is a few EUR short against GBP, without too big a conviction. As a matter of prudence, all other standing orders, except a take profit on EURGBP will be cancelled tonight. After all no one ever knows….
    As to the French election it looks like a choice of the lesser evil…..

  8. Steve | May 4, 2012

    Looks like a Mediterranean vacation will be cheaper than a Mexican one.

  9. Ferruccio | May 4, 2012

    As European citizen, I'd like to add a few datas I think you didn't considered.
    First: the real debt. We often know only official GDP/debt rate, but every state gives a different evaluation of this aggregate. So I cite a report from Central Intelligence Agency World Factbook that shows the following rank, excluding, however, the greatest debtor in the World: USA.
    Take a look about this numbers, about total system debt on GDP:
    1 – Ireland 997%
    2 – Nederlands 467%
    3 – United Kingdom 409%
    4 – Switzerland 273%
    5 – Portugal 228%
    6 – Austria 214%
    These are the new entries, aside of USA (350%) and Japan (245%).

    Second: The German Weimar fear. Weimar Republic, after World War I, gave stance to Nazi regime with an enormous inflation and other really big problems.
    No inflation land, with 50% growth based on european partners, it's easy as a theorycal model, but in different national economic models doesn't work in the same way.
    Europe needs a balance between hard debt and spending control and growth, not only the former. And here inflation can take place in a controlled but expanding size.
    Perhaps F. Hollande would modify Berlin-Paris axis and M. Monti will teach another theory, with M. Draghi besides him.
    And maybe Germans will know that they are not the only few working about.

  10. Mike O | May 4, 2012

    Dear Martin,

    I'm somewhat surprised by your column. So many of you that are right on most of the time still "don't get it". As has been pointed out time and again, capitalism and democracy are equally valid yet competing systems. Capitalism is based on economic efficiency, decentralized decision making and self-interest; the cornerstone of democracy is popular sovereignty, equality and majority rule. The capitalist system has to self correct on a cyclical basis to keep it from breaking down as predicted by Marx. Dust off Kondratieff — the Isaac Newton of economics — and you will see why his theories cost him his life and just how right on they have been since the early 1920's. What has been going on here and abroad is no longer tenable. Too many "fraudsters" and "banksters" have been running amuck for too long a time. The debate now is whether we're going to socialize their losses or not and, is so, to what extent and the vast majority is saying NO — certainly in Europe and increasingly here at home. If there is likely to be a "NWO", the way things are going it's unlikely to be made up of the internationalist elites.

  11. keith | May 4, 2012

    there were clarion voices shouting no,never at the inception of the common market and the euro the populace in the majority of cases were not given a vote or referendum of any sort just the greedy grasping vastly wealthy people pushing things forward with not one politician having the backbone to stand against and the majority realising they would be on the gravy train just nodded things through because after all ,all politicians are greedy corrupt empire builders who care for nothing but themselves it is time there was mass action from the populace of all the euro countries including england because england is putting forward billions of pounds to prop up the euro not one person in all cases voted for these policies itall has a rank rotten smell to nit

  12. Sergey | May 4, 2012

    Whoever will win the French presidentielles, from economic point of view the eurozone will not survive long in its present shape. There are two basic reasons – nobody wants to cover the deficits and there is no way that EURO becomes a real reserve currency not in compliance with the IMF rules. Today's Europe (at least most of it) does not know to earn but to redistribute resources coming from outside. The only possibility to preserve the eurozone depends on political issues and on the readiness of continental Europe to do what it is supposed to do in the major international issues.

  13. Christos | May 4, 2012

    Nice scenario, but too simplistic… Hollande wil never apply those socialist policies he advocates during the presidential campaign (the same did(n't) all his predecessors in France), apart from a couple of minor issues, just to please his electorate.
    As for Greece, most probably, the two main political parties which negotiated the bailout, will have enough seats on parliament to form a coalition government and keep going as nothing happened…
    Finally, if there was a real risk for the euro to break-up, then this would be at least reflected in its current rate on the market; so, please stop this hysteria.

  14. Sergey | May 4, 2012

    The matter is too important to speculate on it.

  15. Hudson | May 4, 2012

    The more conservative Sarkozy and the austerity in London have not solved their problems any more than the conservative congress in U.S. is solving ours.Maybe we need a 75% tax instead of corporate welfare!!

  16. suneel | May 4, 2012

    I am really disappointed you pull out the same rubbish as when Francois Mitterand became president some years back. Mr Holland is among the few clean and technocrat presidential choices available and is the hope in europe of turning back this 1% tax reduction and getting richer for the richest (am being concise in my reply).Get your head out of the anti french sand it is buried in. I read your reports for the insight you offer on many subjects but here you are just rehashing the bash the french and their system,
    wake up to the reality and look long term .

  17. BHOLMES1 | May 4, 2012


    Thanks for writing. Couple of comments.

    First, with regards to Martin's call on silver, it's still early. And don't forget that the CME's aggressive alterations of the margin requirements injected a variable that continues to impact that market.

    Martin is also the guy who recommended gold at $770 an ounce, who warned that credit default swaps were a disaster waiting to happen (when most Americans had never heard the term), and who Slate magazine identified as the prognosticator who, better than anyone alive, best predicted the bear market of 2009. In fact, Slate made a point of noting that super-economist Nouriel Roubini was only the runner up in this "Call the Bear-Market Bottom Sweepstakes."

    That's pretty heady company.

    Each of those "calls" was on the record — most of them right out front here in Money Morning, where our subscribers could be the first to benefit.

    And that's the value that Martin brings to you, as a MM reader. He's willing to stick his neck out and make predictions, and he makes them clearly and publicly … for the very reason I just mentioned — we want all of you to be able to benefit from them. That takes guts and a really strong sense of self.

    But it takes something else, too — global experience. Any wahoo with a blog can make a prediction. But Martin brings decades of experience as a global merchant banker (experience that includes reconstructing the finances of entire countries) that he uses as the base from which to do his analysis and make his predictions.

    And that's the same insight and experience he is drawing upon when he makes these predictions about the French elections.

    Most advisory services charge their subscribers hundreds, thousands, or more, a year to acess this kind of market intelligence.

    We give it to you, our readers, for free.

    Knowing what I know, and given a fair (as in "just") amount of time to permit a prediction to a
    play out, I'll wager that Martin's predictions will, by and large, be proven right.

    Thanks again for writing.

    Respectfully yours;

    William Patalon III
    Executive Editor
    Money Morning & Private Briefing

  18. Mario Simôes | May 4, 2012

    Holland`s victory only will cause some "noise" for a few weeks,after everythig will be more or less the same. Like other european socialists leaders he only wants the job but he already knows that he will not do what he says and euro without France is not possible in the future.Best wishes for all from Portugal.

  19. John | May 4, 2012

    I live in Spain and it's hell here. This article completely misses out on several points. Firstly, the government of Rajoy is the most famous for corruption. So I do not think Martin knows much at all in singing the praises of a PP party that contains strong historical links with the old Franco dictatorship. The reason why every city is rising up in social unrest is that these ferrocious cuts have been made far too quickly resulting in the collapse of millions of small businesses and shops. If, for aggressive austerity, there are no consumers, how does Martin think that Spain has any hope of recovery? Other economists are commenting around the world that Rajoy's (who was elected because he extensively lied to the electorate before the elections) destruction of our economy is "insane." Excessive welfare payments??? My god. You try living on 600 euros a month!! And pay a mortgage. (so of course there are repossessions) Go on just try it year after year like the 55 percent of young qualified people unemployed are forced to do. Martin, I think you have problems with your vision. If a country has 25 percent of the working and adult population out of work, you cannot smash what remains. You blame the socialists completely forgetting that when Aznar (PP) was in power, he was behind the start of the excessive construction boom. It was the PP that started this, not the "wet left" as you call them. And the EU gave away practically free money which fuelled the boom so it has its part to play too. Incompetence and fraud on a massive scale is what is behind much of the trouble. The European Commission does not check where it sends money. I am presenting evidence against them now, and timely so as a similar fraud is emerging in Italy. If a body invites fraud, it will happen And the human toll (2 suicides a day) is not relevant to you with your reference "the ungrateful electorate" in Greece. In Spain anyone looking for food in restarant dustbins can now be arrested (because Aguirre PP thinks it doesn't look nice) which is why robberies are happening in Madrid to just take people's food they are carrying. Grow up Martin because I do not think you know what you are talking about. You cannot smash a country without serious consequences. People provide the income you yearn for but if they are hungry they cannot generate all that lovely dosh can they.

  20. Noel Falconer | May 5, 2012

    Like every halfway competent economist, I knew as they did it that the Greeks were lying their way into not only the euro but the EU. More, the Brussels bureaucrats knew then too, they pretended not to to forward their goal of a United States of Europe, in which they would have even more power.

    The problem is that they have committed so very much of our cash and credit to face-saving 'fixes' that we can't afford the change that's going to happen regardless, in the guise of a catastrophic crash that is all too liable to have megapolitical consequences – Hitler, the Nazis, the Third Reich and WW2 resulted in part from the Weimaar hyper-inflation.

  21. Antoine | May 5, 2012

    A lot of nonsense!
    Sarkozy sent a budget to Brussels leading to a 3% deficit in 2013 and back to balanced budget in 2016. Hollande has prepared a plan to meet the 3% deficit in 2013 and but only achieves the balanced budget to 2017. Very little difference between both and, anyway, let's face it!… Both will fail to deliver.

    Get your facts right before you state things. Hollande does not take back retirement age from 62 to 60, only for people having worked and paid pension contributions for a full 41 years, hence only applying to a small minority. Retirement age with full benefits in France requires 41 years of pension contributions if you want to retire before 67 years old (was 65 before the reform), Hollande does not plan to change this. Hollande plans to introduce a 75% tax ….only on revenues in excess of 1 million €/a, so the impact is very small: only a few hundred million euros receipts (guys earning more know how to go around it anyway, footballers will emigrate)

    Hollande wants some stimulus from EU for growth across Eurozone and will have to convince Angela Merkel. There will be a compromise… as he is a convinced European, a Delorite plus he was trained through French elite schools (HEC, Sciences Po, ENA), so don't expect a soviet….and don't expect Angela to throw hundred of billions through the window to celebrate German-French new found friendship. You must have talked to a Sarko boy who got you panicked and lled you to write a lot of B…

    Don't worry and look at the global crisis: too much debt also means too much credit and leads to underutilisation of labour and misallocation of capital. That's what the world including Europe has to address. It has not arrived yet and this is what you should worry about!

  22. Robert in Canada | May 5, 2012

    In Canada, the governing party is centre/right and has steered our economy and financial system thru the worst financial crisis in our life times.

    Canada is now considered one of the safest and most solid economies in the world. You would think Canadians would support such a party.

    Yet they are tied in popularity polls with the far left wing party (NDP) that promotes policies that are to the left of Greece and France.

    Ignorance must be bliss.

  23. John | May 5, 2012

    I live in Spain and its hell. Martin seems to have forgotten it was the PP (connected to the old Franco dictatorship) under Aznar who started the property bubble and not the socialists' "mess" as Martin describes them. Fraud and corruption is the speciality of the PP lot, not the socialists and fraud damages the economy. And how do you regenerate an economy with company-smashing 'austerity' eh?? Some towns now only have 5 or 6 shops left because austerity has persuaded people not to buy and claro, if 25% overall are unemployed and 55% of under 25's are unemployed, smashing company prospects is basically insane. Martin says "Excessive welfare payments"?? On another planet are you?? Try paying a mortgage and supporting a family on 600 euros will you Martin? Try it for one year and see if you can avoid being thrown out of your house. "Ungrateful" Greeks Martin?? when there are two suicides a day? Are you even human Martin because the human toll of austerity is hell. This aggressive 'austerity' has been carried out so quickly than no one can adjust. Even big companies are being ruined or seriously damaged. And of course the "excessive" bank executive payouts have had nothing to do with the problem eh Martin !!! Nor the absurdly low interest rates that encouraged unwise construction::: Oh no, only the "Ungrateful" are to blame in this Martin's world

  24. Robber Baron | May 6, 2012

    The Athens Olympics is the hallmark of Greek financial mismanagement, but of course the problems run far longer (earlier) than that. Italy and Spain — sheesh, no news here.

    Agreed that Sunday's (today's) elections are important. But France is 5 years or more away from any cataclysmic events. What France might do is stop cooperating on debt relief for other countries, which would spell the end of "Big Euro." Even Sarkozy could lean that way after a tough election. (He'd like to lead for a decade!)

  25. Dayton | May 6, 2012

    For those of us who were been burned by the bust of 74 and 89. 2008 was the year of "I told you so" and" "I knew it would happen". Therefore, we didn't make the same mistake three times. This time, We've seen the Movie before, only this time it's a Greek Tradgedy.
    My motto is; If you can't spend it, eat it, burn it or live in it, Don't Buy it.

  26. Razafindratandra | May 6, 2012


    Such an analysis as this may look threatening. But it is quite narrow at best, and completely out of pace at worst.

    Quite narrow indeed because it looks at politics through the simple lens of public debt, not the other way round, as if political leaders were blind and would never learn anything from experience. For example the sentence "Hollande and the socialists to engage in an orgy of left-wing policies similar to those of Francois Mitterrand's first government from 1981-1983" is astonishing, and could be a free wheel defamation. Hollande has started his career as one of François Mitterrand's counsellors, so why assume that he would repeat the very same errors some 30 years later ?

    Completely out of pace because it is based on the ridiculous assumption that States should be dealt with in the same way as commercial companies, and consequently that they should behave the same way. This cannot be because States have the ability to change the rule. This Hollande has proposed to back the European Stability Mechanism and the New Treaty on a Growth Pact. Which you have consistently ignored.

  27. Chris F. | May 6, 2012

    Whether the Euro will survive may be an open question, but during the past three months as the result of today's election run-off in France has become obvious to all, the Dollar/Euro exchange rate has been remarkably stable (and not especially low) compared to previous months where it was still in question. Just maybe what France needs is some growth oriented policies. And just maybe Spain, with 25% unemployment and a government that thinks the policies of Herbert Hoover got the U.S. out of trouble in the 1930's is the greater threat.

  28. Tim | May 6, 2012

    You definitely have a bias for "austerity measure" and against helping ordinary people who are unemployed because of the idiots in Brussels, and at American Banks who caused this whole mess in the first place. Austerity meausures (ie reducing the size of the government during hard times for the greater population) have been proven over and over again to make things much worse – except of course for the already extremely rich – who benefit greatly. Throwing the majority into poverty, and filling the pockets of the rich with cheap money will never make things better. Hasn't worked in the USA and won't work anywhere else.

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