France's Hollande could struggle to change course

(MoneyWatch) COMMENTARY Call it political contagion: A growing number of voters across Europe, alarmed by the region's deepening economic slump, have come to the same conclusion -- austerity isn't working.

And it isn't only in France, where Socialist Francois Hollande on Sunday was elected president after pledging to scale back the government spending cuts and other deficit-cutting measures favored by his predecessor, Nicolas Sarkozy. Nor is that sentiment confined to Greece, where voters overwhelmingly rejected the EU's prescribed remedies for the nation's debt crisis.

Rather, it was the result of local elections in Germany, the chief architect of austerity under Chancellor Angela Merkel, that most clearly highlighted the change in thinking. Merkel's Christian Democratic Union party this weekend lost ground to its main rival, the center-left Social Democrats, who like Hollande have pushed to boost spending and throttle back on austerity in hopes of accelerating the EU's growth.

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For his part, Hollande has vowed to revise an EU treaty signed last fall that limits how much debt members of the trading zone could carry. "We will bring back Europe on a track for jobs, growth and the future," he said in a speech following his victory. "We're no longer doomed to austerity."

That remains to be seen. Despite his anti-austerity rhetoric during the political campaign against Sarkozy, Hollande has yet to spell out his solutions to the downturn in France and in Europe. Those could include backing targeted investment by eurozone governments, easing the deficit-reduction terms EU states have agreed to, and advocating the use of "eurobonds" to help finance EU members' debts. Hollande's relationship with Merkel will also be tested. Although the German leader signaled her willingness to work with Hollande following his election, she also declared the union's fiscal pact "not negotiable."

Hollande also will be constrained by the reaction of global investors both to the political and economic shift underway in Europe and to any signs of conflict with Merkel. Standard & Poor's in January downgraded France's credit-rating, while investor concerns about France's long-term debt could eventually drive up its borrowing costs. One day after the election in France, financial markets were mostly calm. But investors will be keeping a close eye on Hollande in the weeks ahead for any signs that he is relenting in his broad pledge to reduce France's debt while also moving to jump-start growth.

Like President Obama in the U.S. following the 2008 presidential election, Hollande likely faces a narrow window for implementing his plans and reversing the economic stagnation that swept Sarkozy from office. Hollande, the first Socialist president in France since the late Francois Mitterand left office in 1995, won with 51.7 percent of the vote, with Sarkozy getting 48 percent. That is hardly a mandate, suggesting only tenuous political support for Hollande.

Indeed, the elections in France, Greece, and elsewhere in Europe may indicate less of a blanket rejection of austerity than of a growing skepticism toward the aggressive brand of deficit-reduction favored by Merkel. Economists across the political spectrum have pointed to these cutbacks as the main reason why economies including Spain and the U.K. are tumbling back into recession. In the short-term, that gives Hollande room to maneuver. But over the longer term, the EU's larger economic challenges may leave him little choice but to blend pro-growth policies with an ongoing program to reduce France's debt.