04/25/2012 04:13 pm ET Updated Jun 25, 2012

The French Choice

The first round of the French presidential elections is now over. The result was pretty much as expected, except for an unexpectedly strong showing of right wing nationalist Marine Le Pen --although her 18 percent result was somewhat hyped by an initial estimate of 20 percent that was heavily featured in the first two hours of election-night coverage. Her final result did exceed the best result of her father in 2002, when he finished second in the first round of voting to qualify for the final round.

The bottom line was the narrow victory of the uninspiring, moderate socialist Francois Hollande with 28.6 percent of the vote to incumbent president Nicholas Sarkozy's (described in the French press as "le president sortant" -- outgoing) 27 percent. (Again initial election night coverage showed a greater gap between the two diminishing, yet further Sarkozy's performance.) But the hard fact was that no former French president had ever finished second in the first round in a re-election campaign. One out of four votes for an incumbent president is hardly impressive.

The second round is only two weeks away and Hollande, with the charisma of a shoe salesman, appears to be the likely winner with a convincing margin. The French people, like all Western electorates, are angry that the economy is doing badly even though, as in the United States, that's hardly the fault of the incumbent. But after 17 years of conservative presidents, nothing much has changed in France -- the life there is in fact terrific for many, possibly most -- and the country, like the rest of Europe and arguably the United States -- has drifted into a sclerotic bind of huge welfare obligations and debt, hammered by an exogenous international financial crisis from which there appears to be no exit.

Hollande, it would appear, has no answers. In fact, his "solutions" would seem to add power to the hostile winds, increased bureaucracy, increased taxes and increased spending. The French socialists have been out of power in large measure because they have had their way for so long. The safety net from cradle to grave is more like a combination of a thick mattress and warm blanket. In fact, Hollande proposes to reverse Sarkozy's one major accomplishment, returning the retirement age from 62 back to 60 and to add additional "functionaries". Now that is progress, progress way beyond the state's fiscal capacity!

While Hollande's likely victory will result from bad economic conditions and the personal unpopularity of Sarkozy, one could argue that for the first time in 20 years, the Socialists have become relevant. The principal difference between the two candidates (both would increase taxes, neither is proposing further economic liberalization, one might be harder on immigration) is the argument over "austerity", and tangentially, France's role in Europe.

Sarkozy's signature contribution, other than increasing the retirement age to 62, has been his push for a European solution to the euro crisis and his cooperation with Germany's Angela Merkel. The two together have led Europe to a patchy approach of increased euro bailout funds and European bank liquidity as well as Greek government debt restructuring that have, to date, reduced borrowing costs for the threatened nations of southern Europe, particularly Italy and Spain. This program included at its core a program of fiscal austerity for governments throughout Europe.

Hollande now advocates the abandonment of austerity, a position that would put France in league with Spain -- the most critically affected -- and Greece. His first round victory came one day before the government fell in the Netherlands, where it was unable to institute an austerity budget. (Rich Holland may join Socialist Hollande in an anti-German revolt.) A broad consensus is growing that SOMETHING, God knows what, must be done to create growth in the euro zone. The end of Merkozy policies (the collaboration of Germany and France), of austerity, may be more necessary and less irrational than first thought. And Hollande may be its bearer.

The election of Hollande would lead to a major change in German-French relations. The prospect of German-French discord in Europe offers at minimum good theatre. The resolute Merkel, working with the endomorphic, to date perceived as wimpy, Hollande, contains the prospect of a new dynamic in Europe, but who doubts the resolve of Merkel? She is the banker. Will that victory affect the bond market in Europe? Will Keynesians suddenly arise within the Brussels hierarchy and take Europe on a new course? On May 7, the day after round two, if Hollande wins, the market will give us a quick answer. In the meantime, fear of change could tip the election back to Sarkozy. As they say, elections matter.