A No-Confidence Vote for France

Socialist leader Francois Hollande is likely to be the next president of France, beating incumbent Nicolas Sarkozy. That’s bad for business, and worse for the French economy.

French President Nicolas Sarkozy seems destined to be the next electoral casualty of the euro-zone sovereign-debt crisis. Sarkozy is deeply unpopular at home, but his expected defeat in this year’s presidential elections could be a setback for France.

The likely victor, François Hollande, is a socialist whose policies would create uncertainty in the short term and foment further economic stagnation in the longer run. Like much of the euro zone, France is plagued by diminishing competitiveness, high unemployment, and excessive government spending. Hollande has proposed raising the state’s tab, which could worsen the other problems and punish business.

Sarkozy and Hollande will lead in the first round of voting on April 22, but neither is likely to garner enough votes to declare an outright victory. All polls point to a win for Hollande in the May 6 runoff, but the French have pulled surprises in the past.

Sarkozy, 57, was elected president in 2007, and is paying the price for failing to deliver on his campaign promises amid the worst financial downturn in Europe since World War II. He has earned plaudits for persuading Germany, Europe’s largest economy, to take a softer approach to the euro-zone crisis, but domestic issues matter more to French voters. France is flirting with economic recession, and in January was stripped of its prized triple-A credit rating by Standard & Poor’s.

Hollande, also 57, is a graduate of France’s prestigious École Nationale d’Administration, which boasts presidents and prime ministers among its alumni. But his political experience is limited, encompassing a decade as secretary of the Socialist Party and a stint as mayor of a provincial town. Ségolène Royal, his former partner and mother of his four children, lost to Sarkozy in ’07. Hollande secured the party’s nomination last year, after scandal enveloped the favorite, Dominique Strauss-Kahn.

A pro-European, Hollande is a protégé of former European Commission President Jacques Delors, one of the architects of the euro. To maintain stability and continuity in Europe, he will need to emulate Sarkozy’s cozy relationship with German Chancellor Angela Merkel. But the relationship could be complicated, as they occupy different sides of the political spectrum. At some point, Merkel may need to check Hollande’s soft Keynesian tendencies: Germany doesn’t have the resources to bail out France.

Hollande’s economic policies would do little to boost France’s competitiveness, and his goal of eliminating the budget deficit by 2017 is apt to remain elusive. He aims to kick-start the economy by adding jobs and creating growth, but that means even greater government outlays. Government expenditures currently equal 57% of gross domestic product, one of the highest levels in Europe and nine percentage points more than in Germany.

Following Sarkozy’s lead, Hollande looks to raise taxes, and favors imposing an astonishing 75% tax rate on those earning more than a million euros ($1.32 million). The backlash could be catastrophic, sparking a wealth exodus. After all, London, Frankfurt, and Zurich aren’t far away.

Vania Mareuse, managing director at Bryan Garnier in Paris, worries that Hollande’s spending plans would aggravate France’s budget deficit and hurt the euro, which has been resilient until now. Mareuse is trying to reduce his exposure to the common currency. “If there is a move, it will go to $1.15 or $1.10,” he says. The euro traded last week at $1.32.

HOLLANDE ALREADY HAS TAKENaim at the financial world, declaring it his enemy. He plans to separate banks’ retail and investment operations, and bar French institutions from operating in tax havens. Higher income-tax rates would hit banks and utilities hardest. Other tax changes, such as the cancelation of credits for research, would crimp the aerospace and defense sector and the media industry. Brokerage Cheuvreux identifies potential losers as the bank Natixis (ticker: KN.France), the utilityGDF Suez (GSZ.France), and Carrefour (CA.France), the giant supermarket chain.

French companies such as LVMH Moët Hennessy Louis Vuitton (MC.France),Capgemini (CAP.France) and the catering outfit Sodexo (SW.France), which generate most of their sales in international markets, could fare better. But France’s fortunes, in general, won’t revive until it finds a leader willing to whip its public finances into shape.