24 April 2012

Is Sarkozy Finished?

I was travelling in the last couple of weeks and I landed to Paris just as polling stations were closing. My timing was such that, the cab driver told me he could not legally answer my questions on elections before 8 p.m. and asked me to be patient for another three minutes. He actually said that, which makes him and all the French cabbies official pundits.


The radio was on and we found out that the exit polls gave the far right candidate, Marine Le Pen, an unexpected third place with roughly 20 percent of the vote (the next day it was corrected to 18 percent). That means almost one in five French voters cast their ballots for her. No one was expecting that.  (That's Marine le Pen and her proud papa)


Most analysts were convinced that French people were aligned with the Occupy Wall Street (OWS) sentiment. After all, Jean Luc Melenchon, the charismatic leader of the Left Party was on the rise and everyone expected him to poll very strongly to finish third after Sarkozy and Hollande.




The problem is that the OWS sentiment is rooted in fear. OWS happened after tens of millions of people lost their life savings mostly tied in overvalued real estate. Millions lost their jobs and several million families became homeless. You wouldn't know any of this from the sarcastic and nonchalant coverage but this is the context. As any student of 1930s and 40s will tell you, fear is more likely to move you to the right when you have something to lose. It is more likely to move you to the left when you have nothing left to lose. Remember the song?


Hence, if I were a politician, I would worry about Greece moving to far left but France is not there.


Not yet anyway.


Despite the unexpected results, most pundits believe that Hollande will be victorious in the second round. Opinion polls showed him as the clear favorite for months now and with Melenchon voters firmly behind him, it is widely believed that these elections are Hollande's to lose.


I am not that convinced.


Run off elections have a different dynamic and until the first round is over I wouldn't take whatever people told pollsters too seriously. There are three things in Sarkozy's favor:



1) Le Pen voters and political fear factor


Le Pen's voters are more likely to vote for Sarkozy. Or to put it differently, they are very unlikely to vote for Hollande.
Polls taken on Sunday by three institutes suggested that between 48 and 60 percent of Le Pen voters planned to switch to the president, while Bayrou's backers split almost evenly between the two finalists, with one third undecided.
One reason opinion polls failed to predict Le Pen's rise is the well known tendency of French voters to mislead pollsters. Call it national paranoia but most people here will never share that information and if pressured they would lie. If they did not tell their choices before the first round I see no reason to believe that they will be more truthful this time.


My guess is that Sarkozy will announce tough anti-immigration measures (one of the advantages of being the incumbent) and start using very heated rhetoric about "the others" who took their jobs and destroyed their way of life. And the fear factor will be very effective on that segment of the electorate.
Studies show Le Pen has attracted the working-class vote, more so than Hollande or the Socialist party; also that her supporters tend to be poor, unemployed or in precarious jobs. They are in rural areas and rural towns, or on the periphery of big cities. They have often been hit by the death of French industry and closing factories. Many were first-time voters. 
In 2007 these same people voted for Sarkozy (destroying Front National in the process) and while they now say they hate him, faced with a president like Hollande, who is likely to be soft on immigrants, they might still do it.
"I could never vote for Sarkozy, he has failed in all his promises. As for Hollande, he tries to say all is well and everyone is equal. That's rubbish; they're not."
2) Financial markets and economic fears 


Financial markets are making themselves heard ahead of the second round with dire warnings:
“If you combine an election of Fran├žois Hollande with a worsening economic situation, no improvement in Spain, and a possible new downgrade of France by the ratings agencies, there is a high likelihood” that France’s borrowing costs will also rise, said Evariste Lefeuvre, chief economist at the French investment bank Natixis in New York.
Such sentiments are viewed warily by many French voters, and Mr. Sarkozy’s opponents, who are exasperated by what they see as a crass effort by financial players to browbeat France into accepting more of the type of austerity measures that have squeezed growth in Greece, Spain and other troubled euro zone countries.
And it is not just idle talk:
The German derivatives exchange, Eurex, ignited a political furor in France when it began trading a futures contract Monday enabling investors to hedge their bets on French government debt. The apparent premise is that France’s creditworthiness could slip if the government — whether led by Mr. Sarkozy or Mr. Hollande — backslides on efforts to cut its debt and deficit.
This may sound trivial to North American ears, as their electorate are notoriously uninformed and apathetic. American presidents are routinely elected by 35-50 percent of the eligible voters. This is not the case in France. French voters are very well informed and their participation rate is one of the highest among the industrialized countries. Last Sunday's turnout, with a little over 80 percent of voters showing up at the ballot box, was not even the highest participation rate in the Fifth Republic.


So, I expect Sarkozy and his media partners to continuously repeat this message and find a receptive audience. This is why he has suggested three debates in between rounds, as he expect to do quite well with this message of economic fear. And this is also why Hollande has rejected his proposal and agreed to only one debate.


I should also point out that the importance attributed to the financial markets is not a Marxist conspiracy theory. Roughly 60 percent of the French debt is held by foreign banks and entities and with a national debt at 90 percent of GDP, that is very significant. To provide some perspective, in the case of the UK, the portion of their debt held by foreigners is only 24.8 percent. Bank of England has been buying British debt by the boatload, an option that is not open to Eurozone countries. In that sense, what the financial markets think about France and its next president can hardly be underestimated. And the French electorate is sufficiently well informed to worry about various implications of their final choice.

With the Dutch government collapsing over austerity and debt issues, uncertainties over Spain's ability to recover from crippling measures and Italy and Greece's dismal economic prospects, what happens in France will impact both the financial markets and all other Eurozone economies. I expect Merkel and others to provide a boost to Sarkozy with judicially timed comments, observations and warnings.


There is a reason why they are known as Merkozy.


3) Clarity of message.


Sarkozy has always been about fear.


He used it in 2007 successfully and he is getting ready to do it again. Before the first round, he faced nine candidates and his allotted time was the same as any one of them. So he couldn't do much. He basically defended himself in all debates as he was their common target. Now, he has just one rival. He will use political and economic fears to attack him as a weak and soft candidate, someone with no experience and no clear plan to save the country.


Francois Hollande is not a great debater and his plan does not contain many specifics.


He wants to say that he will increase minimum wage but he is worried about alienating markets. As explained above, he is in no position to go against these markets if he wants to continue to borrow cheaply when he becomes president. He wants to criticize austerity policies but there is a fiscal compact in place (imposed by Germany) and he is not in a position to change France's position if he is elected. He would like to keep Melenchon voters who couldn't care less about financial markets while simultaneously wooing Bayrou's centrists who don't want to vote for Sarkozy. And he is now trying to get some of the Le Pen supporters as well. That is a very difficult coalition to hold together.


From where I sit, it looks like Sarkozy's task of moving to a far right position and playing with people's fears is much easier to accomplish.


I have to confess that it is easier to be a contrarian when you prefer Hollande to Sarkozy. If he wins I am happy to be wrong.


But I think the fear factor will help Sarkozy in the end.

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