France’s Sarkozy, Hollande head for runoff

Far-right’s Le Pen seen in third in French first round

By

WilliamL. Watts

Shawn Langlois/MarketWatch

French citizens line up in London Sunday to vote in France's national election. This line in South Kensington extended for 10 blocks.

FRANKFURT (MarketWatch)—French President Nicolas Sarkozy faces an uphill battle to avoid becoming the latest European leader to be ousted in the wake of the global financial crisis after being projected to come in second to Socialist challenger François Hollande in Sunday’s first-round presidential election.

Reuters

François Hollande

In an unexpected twist, far-right National Front leader Marine Le Pen was set for a third-place finish in the 10 candidate field, while far-left firebrand Jean-Luc Melenchon appeared set to underperform pollsters’ expectations with a fourth-place finish.

Projections based on preliminary results and exit polls by survey firm showed Hollande with 28.8% of the vote, while Sarkozy was seen at 26.1%, according to news channel France 24. Le Pen was seen with 18.5% of the vote, while Melenchon was on track for around 11.7%.

Sarkozy is the first incumbent president to fail to garner the most votes in the first round. He will go head-to-head with Hollande in a May 6 runoff.

The unexpectedly strong showing by the ani-immigrant Le Pen may give Sarkozy hope. The president told supporters the first-round results underlined voters’ “anxieties” over outsourcing, the need to control immigration and other issues.

He called for a series of three debates with Hollande ahead of the May 6 vote and said he sought the support of all French voters who want to avoid the fate of France's European neighbors who have been “swept away” by the region’s debt crisis.

Hollande said the first-round results “repudiated” Sarkozy’s policies and campaign. In an apparent nod to market anxieties over a Sarkozy presidency, the candidate said it was his duty to put Europe on a path “to growth and jobs.”

French government bonds suffered, sending yields (10YR_FRA) higher last week, while credit default swaps—instruments used to insure government debt against default—saw spreads widen. Strategists said nervousness over France’s relationship with Germany and the country’s own troubled fiscal outlook have been amplified by the tone of the French campaign.

Hollande has vowed to reopen the fiscal compact—a recently signed treaty that aims to enshrine tougher budget rules across the euro zone The compact was the brainchild of German Chancellor Angela Merkel and was agreed by most European leaders with the aid of Sarkozy.

Both Sarkozy and Hollande, meanwhile, have called for a re-examination of the European Central Bank’s mandate, urging that the Frankfurt-based institution, which controls monetary policy for the euro zone, also responsible for supporting growth.

The ECB’s mandate is limited by the Maastricht Treaty to controlling inflation, casting it in the image of Germany’s famously inflation-adverse Bundesbank.

Polls have consistently shown the conservative Sarkozy trailing Hollande in a head-to-head matchup. Sarkozy’s campaign has been undercut by a rise in unemployment to nearly 10%, economic anxiety and the president’s mercurial manner, pollsters say.

Reuters

Nicolas Sarkozy

Sarkozy is fighting to avoid joining a parade of European leaders who have been turned out of office since the financial crisis broke in 2008. So far, leaders in euro-zone countries including Greece, Italy, Spain, Portugal, Ireland, Italy, Slovenia, Finland and Slovakia have fallen.

Hollande has been criticized for a lack of experience, having never held a ministerial position during his political career.

Sarkozy, in the run-up to the first-round vote, tacked to the right. He pressed for stricter controls on immigration and raised questions about France’s relationship with the rest of Europe by threatening to pull France out of the European Union’s program of looser internal passport controls. He also urged a “buy European” act that would require EU governments to favor European companies for government purchases and contracts.

Sarkozy was seen attempting to woo voters from ultra-right Le Pen. A triumphant Le Pen told cheering supporters that her strong showing underscored the weakness of Sarkozy and showed that the National Front was the only viable opposition to the “ultraliberal, permissive left.”

Melenchon, without mentioning Hollande by name, urged supporters to turn out in the second round to defeat Sarkozy.

Sarkozy has called for balancing France’s budget in 2016, while Hollande has targeted 2017. Sarkozy has called for a mix of spending cuts and tax hikes, while Hollande has outlined some spending increases which he intends to more than offset with tax hikes, including the imposition of a top tax rate of 75% on top earners.

Both candidates are expected to tack back to the center in the next two weeks.

Economists at UBS said markets are likely to see much difference between Sarkozy’s 2016 balanced-budget goal and Hollande's plan to get there in 2017.

Markets may become unsettled, however, over Hollande's call to reopen the fiscal compact, particularly if he sticks o that line in an effort to keep hard-left voters on side ahead of parliamentary elections that will follow in June, they said, in a research note.

“To the extent investors view Hollande’s potential policies as less supportive of French financial improvement, a Hollande victory could see uncertainty spill over intoe Europe’s second-largest country, 3½ times as large as Greece, Ireland and Portugal combined,” he said, in a note to clients.

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