Electorates cannot have it both ways

by John Plender

Financial Times
May 8, 2012

Does the relatively calm bond market response to François Hollande’s victory in the French presidential election mean that even bond vigilantes have come round to the idea that more growth and less austerity in the eurozone might be a good thing? Certainly there have been signs recently that investors have lost patience with mindless austerity.

Yet as Olivier Blanchard, chief economist of the International Monetary Fund, remarks in the IMF’s latest World Economic Outlook, markets tend to want it both ways. They demand fiscal consolidation but react badly when that leads to lower economic growth.

The markets are not alone. In effect the French electorate gave Mr Hollande a mandate to do what cannot be done. It appears to want growth, along with an old fashioned tax and spend strategy, plus a reversal of globalisation, with everything, please, to stay the same.

So, too, with Greece, where polls suggest that more than 70 per cent want to stick with the euro, but the anti-austerity electoral outcome makes it more likely that the country will find itself in the eurozone ejector seat. Indeed, the question is not so much whether it will happen, as how much contagion will ensue across the eurozone when it does. For Greek politicians the job description is mission impossible.

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