Will the French Elections Derail the Fiscal Compact in Europe?

On March 2, 25 European Union members signed their long-discussed fiscal compact, the treaty committing them to balance their budgets in the future, paving the way for national ratification of the compact before January 2013. Most analysts expect the compact to be ratified in most countries. But a few signs of doubt have emerged over the issue in some important places. In late February, the Irish government announced that it would require a referendum to adopt the treaty. And more worryingly for many, the compact has become an issue in the French presidential elections, due later this spring. Francois Hollande, the Socialist candidate challenging President Nicolas Sarkozy, a champion of the fiscal compact, has pledged to renegotiate it if elected. Indeed, the Socialists abstained in a separate vote to create a European Stability Mechanism (ESM) in both houses of Parliament when it was approved in late February, citing their concerns about the fiscal compact. (The ESM is a financing mechanism designed to prevent contagion in the sovereign debt crisis.)

There is actually broad consensus in France in support of both the fiscal compact and the ESM, however. Both mainstream political parties—the Socialists and the Popular Union Movement (UMP) of Sarkozy—are committed to European integration and the acceptance of the principle of fiscal consolidation to ensure stability in a monetary union. Socialists seek to display their credentials as a "responsible" government party by selecting Hollande, a Europhile and a moderate, and the party has emphasized the need to return to fiscal equilibrium. For his part, Sarkozy, like the Socialists, has often criticized what he considered to have been an excessive German insistence on austerity as opposed to growth policies. Their differences are thus mainly tactical and ones of emphasis. The Socialists stress their demands for more growth policies, while President Sarkozy stresses the need for fiscal discipline. In the dynamics of the campaign, Sarkozy wants to contain the rightist National Front (led by Marine Le Pen, the daughter of Jean-Marie Le Pen) by sharpening his positions on immigration law and entitlements, not by changing his stance on European matters. On the left, the "Left Front" led by Jean-Luc Mélenchon argues against austerity policies they perceive as hurting employment and the working class. The left sees austerity as reflecting diktats from Berlin and Brussels. Indeed, some within the left wing of the Socialist party hold similar positions. Hollande's harsh rhetoric criticizing banks, as well as his recent proposal to raise the top marginal tax rate to 75 percent for incomes exceeding one million euros, can be interpreted as an answer to this camp.

Hollande's overall support for the European project is very unlikely to change, but his approach is vague. Although he announced that he would renegotiate the fiscal part of the treaty, his demands are unclear. He seems less inclined to seek an overhaul than to ask for additions in favor of growth and employment. Such steps would include a larger European Investment Bank, the creation of European "project bonds," or more infrastructure spending in the EU budget. According to him, these relatively modest Keynesian additions do not entail reopening the fiscal compact in a significant way. He advocates larger reforms of the euro area, such as expanding the mandate of the European Central Bank to include growth objectives like those of the Federal Reserve in the United States, or a more ambitious fiscal union (with full-fledged eurobonds). But he argues that any major changes in the fiscal union—which he has not spelled out in any case —should be deferred for later consideration. (The Germans, on the other hand, have repeatedly disagreed with the sort of expansionary policies advocated by Hollande.) The abstention in the vote on the ESM came despite the Socialists saying they support it in principle. Their argument in favor of abstaining was that ESM funds cannot be allocated to any country that has not adopted the fiscal compact. The Socialists' refusal to support the stability mechanism was denounced as a "historic mistake" by Prime Minister Francois Fillon, Sarkozy's ally, and criticized by pro-Europeans on the left.

Even if Sarkozy is re-elected, implementation of the treaties might face difficulties and uncertainty. It is unclear whether a "golden rule" (as the treaty's balanced budget rule is called in France) would require changing the French Constitution. There are good reasons to believe that it does: In a recent report, Jacques Delpla, a member of the French Council of Economic Analysis, argued that a rule constraining future parliaments would be easily overturned or declared unconstitutional without such an amendment. Furthermore, Sarkozy attempted last year to adopt a balanced budget rule, which involved a modification of the Constitution, but was blocked by the loss of his majority in the Senate. Changing the Constitution requires a majority of 60 percent by both the Senate and National Assembly. Only a UMP victory by a wide margin at the elections at the National Assembly in June could provide Sarkozy with a majority sufficient to reach that level. (The next elections in the Senate will take place only in 2014.) Under these circumstances, the only way to adopt a golden rule in the Constitution would be to have a referendum—as hinted by Prime Minister Fillon in February. Whoever wins, there is certain to be an examination of ways to adopt the rule without a Constitutional change, on the other hand. If Hollande wins the presidency, he will probably not seek a referendum for approval of any European treaty. He has maintained that referendums should be used only for major changes, such as the Maastricht treaty creating the economic and monetary union in 1992.

European leaders are concerned about a Hollande victory, and there are reports that some have refused to meet with him (according to Der Spiegel). They are said to fear the renegotiation of the treaty that he advocates. But given the gradual approach taken by Hollande, and the long Europhile tradition in the Socialist party, those fears seem overblown. The adoption of the fiscal compact would certainly be delayed, but could well occur before the January 1, 2013 deadline for its ratification.