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Sunday, April 22, 2007

An uncertain presidential election in France

by Manuel Alvarez-Rivera: San Juan, Puerto Rico

French voters go to the polls this Sunday to take part in a presidential election with a total of twelve candidates on the ballot, spanning the entire political spectrum from far right to far left. However, should no candidate attain an absolute majority of valid votes, a runoff election will be held on May 6 among the top two candidates on the first round of voting. French voters residing abroad also take part in the election, as do France's overseas departments and territories - the remnants of a once-vast colonial empire.

Unlike in most other European countries with elected heads of state, the Constitution of the French Fifth Republic provides for a strong presidency, as envisaged by its founder, General Charles de Gaulle, who was brought back from political retirement in 1958, when France appeared to be on the verge of civil war over the Algeria crisis. At his behest, French voters approved a new constitution that replaced the parliamentary system of government that had existed in France under the Third Republic (1875-1940) and the Fourth (1946-58) with a hybrid system that retained some parliamentary features, but nonetheless reflected de Gaulle's views of how France should be governed.

Although the 1958 constitution retained the office of prime minister, its role in governmental affairs is clearly subordinate to the presidency - except when the party or parties supporting the president become a minority in the National Assembly (the lower house of the French legislature). In such cases, it has become customary for the head of state to "cohabit" with a prime minister from the majority opposition parties, in essence allowing the system to revert a parliamentary form of government. Nonetheless, in the three periods of "cohabitation" under the Fifth Republic (in 1986-88, 1993-95, and 1997-2002), the president continued to exercise a prominent role in certain policy areas, most notably foreign affairs.

Originally, the president was indirectly chosen by an electoral college of about 80,000 notables for a term of seven years (cut down to five after a 2000 referendum), and in 1958 de Gaulle himself was elected by this procedure as the first president of the Fifth Republic. However, in 1962 de Gaulle, who by then had successfully extricated France out of Algeria, called a referendum on his proposal to have the president elected by popular voting. Both the measure itself and the way in which it was advanced were highly controversial. At the time, France had only had a single presidential election by popular voting, in 1848, and the winner of that poll - Louis-Napoléon (the nephew of Napoléon Bonaparte) - went on to destroy the incipient Second Republic and proclaim himself Emperor Napoleon III. Moreover, de Gaulle bypassed the legislature by calling the referendum under the terms of Article 11 of the Constitution (which allows the President of the Republic to submit to a referendum any government bill which deals with the organization of the public authorities), rather than Article 89 (which specifically provides for amendments to the Constitution, requiring parliamentary approval for these). Nonetheless, French voters approved the measure by a decisive margin, and since 1965 presidential elections have been held under the two-round or runoff system of voting.

It was widely expected that General de Gaulle would be easily re-elected in 1965, but he faced an unexpectedly strong challenge from leftist leader François Mitterrand, who forced de Gaulle into a runoff election. De Gaulle won in the second round with a clear majority, but his margin of victory was not particularly impressive, considering his political stature. Since then, the French electorate has continued to deliver surprise outcomes on a frequent basis, the most shocking of all in the 2002 presidential election, when right-wing extremist Jean-Marie Le Pen of the National Front unexpectedly outpolled Socialist Party candidate (and then-Prime Minister) Lionel Jospin for second place in the first round of voting, and in the process contradicted every opinion poll, which had Le Pen in third place (nonetheless, incumbent President Jacques Chirac - who topped the poll in the first round - crushed Le Pen in the runoff; Presidential Elections in France has a comprehensive review of the French electoral system and party politics under the Fifth Republic).

So far, no presidential candidate has ever secured an absolute majority of votes in the first round of voting, in which each party has usually promoted its own candidate. Minor-party candidates have been able to garner support regardless of their electoral chances, since voters are not as pressured into supporting candidates from other parties with better electoral prospects as would be the case under a single-round plurality system: French presidential elections are not likely to be decided until the second round, and the runoff election has usually been a contest between a right-of-center candidate opposed by a leftist hopeful; the sole exceptions to this norm were in 1969 and 2002. In the latter case, a proliferation of left-wing candidates, which siphoned votes from Socialist candidate Jospin, contributed to his exclusion from the runoff vote. Consequently, some minor parties usually allied with the Socialists chose not to field their own presidential candidates in 2007, opting instead to support the Socialist Party nominee.

Nonetheless, the system has encouraged a tendency towards differentiation among the various political groups (thus reinforcing the country's multi-party system), since these can test their electoral strength by themselves in the first round of voting, but this tendency has been checked by the necessity to build alliances in order to reach and win the runoff election. At the same time, it should be noted that political parties in France tend to be more fluid than their counterparts in other Western European countries, particularly - but by no means exclusively - on the right and center (as illustrated by their frequent name changes and realignments); moreover, personalities often play a more important role in the political process than the parties themselves. Since 1965, France has chosen right-of-center presidents in all but two elections, but the country's only socialist president - François Mitterrand, who served two terms in office from 1981 to 1995 - remains the Fifth Republic's longest-serving head of state.

At the time of writing, it's all but certain there will be a second round of voting on May 6, but it's not entirely clear which two candidates will make it to the runoff. Of the dozen men and women in the race, only four appear to have a realistic chance of making it to the runoff vote: former Interior Minister Nicolas Sarkozy of the ruling, conservative Union for a Popular Movement (UMP), who has been endorsed by outgoing President (and longtime rival) Jacques Chirac; Poitou-Charentes regional president Ségolène Royal of the left-wing Socialist Party (PS), who is also the first major-party female presidential candidate in the history of France; François Bayrou, leader of the centrist Union for French Democracy (UDF); and Jean-Marie Le Pen, founder and leader of the far-right National Front (FN). Opinion polls have consistently placed Sarkozy and Royal in first and second place, with Bayrou third, sometimes within striking distance of Royal (and at times Sarkozy as well), and Le Pen further behind. Interestingly, the polls indicate that if Bayrou were to make it to the runoff election, he would easily defeat any of the other three major contenders.

In fact, Bayrou's unexpectedly strong showing on the polls (some of which have him closely behind Royal) has been a considerable source of anxiety to some Socialist leaders, who fear a repeat of the 2002 electoral disaster, when the party found itself shut out of the runoff vote; however, the Socialist Party's old guard does not appear to be too bothered concerning a poor showing by Royal, since she prevailed over them to secure the party's presidential nomination, much to their displeasure.

Royal's prospects may be also be affected by four far-left candidates on the race - a Communist and three Trotskyists - as well as by Green and altermondialisme (anti-globalization) candidates: none is expected to reach the runoff election, but they could cost Royal the votes needed to get to the second round.

On the right, Sarkozy - who has remained consistently ahead in opinion polls (although by sometimes precarious margins) - seems to be in a safer position than Royal to make it to the runoff, but a strong showing by either Bayrou or Le Pen (or both) could upset all calculations. However, while Sarkozy's exclusion from the second round may be less likely to happen than Royal's, he could conceivably fail to top the poll in the first round, which would be politically embarrassing but would not necessarily inflict irreparable damage to his campaign: Valéry Giscard d'Estaing (in 1974), Mitterrand (in 1981) and Chirac (in 1995) all overcame second-place finishes on the first round of voting and ultimately prevailed in the runoff election.

In all, the race remains difficult to predict: there has been a large number of undecided voters late into the race (as much as a third of the electorate two days before the election), which combined with the still-recent memory of the 2002 opinion polls fiasco has given an air of uncertainty to the 2007 presidential election.


On Wednesday, April 25, 2007, the French Constitutional Council announced final results of the 2007 presidential election's first round of voting were as follows:

Nicolas Sarkozy - 11,448,663 votes (31.2%)
Ségolène Royal - 9,500,112 votes (25.9%)
François Bayrou - 6,820,119 votes (18.6%)
Jean-Marie Le Pen - 3,834,530 votes (10.4%)
Olivier Besancenot - 1,498,581 votes (4.1%)
Philippe de Villiers - 818,407 votes (2.2%)
Marie-George Buffet - 707,268 votes (1.9%)
Dominique Voynet - 576,666 votes (1.6%)
Arlette Laguiller - 487,857 votes (1.3%)
José Bové - 483,008 votes (1.3%)
Frédéric Nihous - 420,645 votes (1.1%)
Gérard Schivardi - 123,540 votes (0.3%)

Voter turnout in the election stood at 83.8% - the highest figure in twenty-six years. Since no candidate won an absolute majority of votes, a runoff election will be held on May 6 between Sarkozy and Royal.

Sarkozy's share of the vote was the largest polled by a center-right (and for that matter Gaullist) candidate in the past quarter-century, but at the same time, Royal's percentage was also the highest won by a Socialist candidate in the past twenty-six years, matching François Mitterrand's in 1981. More importantly, she exorcised the ghost of 2002 and made it to the runoff election - a goal which at one point had appeared somewhat uncertain.

Although Bayrou failed to make it to the runoff - a possibility hinted by some opinion polls earlier in the race - he nonetheless tripled his vote in 2002, when the UDF was largely sidelined by the emerging UMP. In the long run, Bayrou's strong showing may frustrate the UMP's plans of bringing together all of the country's center-right forces under a single banner.

Meanwhile, Le Pen's steady electoral advance finally came to a crashing halt: not only did he fail to improve upon his result in the preceding election (as he had in the last two presidential votes), but he had his worst presidential showing since the National Front became a major political force in France in the mid-1980s.

On the other end of the political spectrum, all but one of the candidates to the left of Royal fared badly (the notable exception being Olivier Besancenot, who practically matched his result in the last election); in particular, the once-powerful Communist Party continues to dwindle into electoral irrelevance. The "left of the left" appears to have suffered from tactical voting in favor of Royal, as many left-wing voters were anxious to avoid a repeat of the events in 2002, when a fragmented leftist vote led to the Socialists' exclusion from the second round.

In sum, the Ségo-Sarko showdown, once much anticipated but later thrown into doubt, has become a reality after all. France will return to the polls in less than two weeks, and opinion polls - which correctly predicted the outcome of the first round this year - already have Sarkozy leading Royal in the runoff vote.

Sarko-Ségo, or the 2007 French presidential runoff race has further coverage of the second round of voting.

Wednesday, April 18, 2007

Deciphering De-Coupling - A Change in the Fundamentals?

by Claus Vistesen: Copenhagen

I have been around long enough in the econ blogsphere to know a buzz-word when I see one and clearly de-coupling represents just that. In essence, the notion of de-coupling hovers around the question of how well (if at all) the rest of the world can weather a US slowdown or perhaps even a recession. Of course this discussion is intensified through the realities of the global imbalances which, at least in terms of the stylised facts, suggest that if the US consumer grinds down consumption expenditure it will have a marked effect through strong trade linkages which are proxied by the whopping US current account deficit on the one hand and the export dependent economies on the other. In short, how will we all fair if and when demand in the US finally slows down?

In this note my argument will centre on two main mechanisms. Firstly, I will draw on a flurry of recent commentary dealing with how well the world will cope in the immediate future with what seems to be an ongoing and sustained slowdown in US growth going into 2007 and beyond. Secondly and more importantly, I will assess the concept of de-coupling and in particular the idea of a re-balancing of the imbalances from a more long term and structural perspective. Crucially the relationship between the notion of de-coupling and global macroeconomic imbalances and the potential for a global re-balancing act will be explored as I believe this is a link which is often not made sufficiently explicit in the general analysis and discourse on this topic.

The Current US slowdown - A Perfect Switch of Batons?

The economic debate of late in both the econ blogsphere and in the more traditional media channels has been somewhat preocupied with the notion of de-coupling, so a brief overview of the discourse might be in order.

At the heart of this discussion stands the recent IMF World Economic Outlook 2007, and more specifically the chapter (PDF) specifically devoted to de-coupling. In the slipstream of this document many bloggers and other commentators have positioned themselves along an axis of either for or against the notion of de-coupling. The dividing line here splits some pretty hefty opinion makers. Amongst the skeptics of de-coupling we find for example, Nouriel Roubini from RGE, Stephen Roach from Morgan Stanley and Wolfgang Munchau from Eurointelligence. On the other side of the fence we find some equally impressive heavyweights like Goldman Sachs and the Economist. This list of course is far from complete, and even a bit artificial since many of the views are, as always, more nuanced and balanced than a stright pro- or contra, but putting things this way does give an idea of the extent of the controversy surrounding the current discussion. So, what does the IMF's recent research have to say about de-coupling in so far as we might consider them something of a an arbiter in the general discussion? For all intent and purposes, Nouriel Roubini's account of the IMF piece (linked above) is as a good a guide as you will get and I also believe that his review highlights the most salient point:

The world would be able to decouple from a US slowdown if the US experiences a soft landing; but the world would not decouple if the US experiences a hard landing.

Indeed, this does seem to be the message to take away from IMF's review, but I would actually take things one step further by arguing that the IMF more or less decisively argues against the notion of de-coupling. Let me try to explain. The anatomy of de-coupling in the short term, which is what we are really discussing here, rests on two points. Firstly, there is the general character of the current US slowdown, and whether this will remain restricted to the housing sector (i.e. a soft landing) or whether it will feed strongly over into the rest of the economy (i.e. a hard landing). Secondly, and more centrally in terms of the present IMF study, we need to explore and asses the transmission mechanisms and spillover linkages which are in operation between the world's large economies/regions, and crucially ask the question as to whether Europe, Asia, and to a lesser extent the rest of the Western Hemisphere, can, at precisely this juncture, unschackle themselves from a slowing US economy?

In terms of the current US slowdown the bets are still proverbially out. We all well aware of the hard landing calls which are around, and in particular Nouriel Roubini's arguments concerning the risk of a severe hard landing, but there are also plenty of contrarian voices, such as, for example, this recent note from John C. Williams of the San Francisco Fed (hat tip Mark Thoma) which offers a review of the recent evolution in US economic data and also gives a more positive immediate outlook (i.e. forecast) for the economy. In essence, the forecast translates into a soft landing for the US economy with the expectation of GDP growth at about 2-2.5% for the remainder of 2007. Interestingly enough the forecast includes a slowdown in private consumption (i.e. a spillover effect) which is then compensated by a pickup in capex. Also the recent positive employment data is cited as evidence of a strong labour market. Yet, it is important to note that there are considerable doubts attached to this rather positive outlook. There is, for example, some evidence that capex may well be winding down, which, if confirmed, would pretty much leave the US consumer as the last line of defense. On that note, recent data do suggest that this line of defense is holding up, at least for now, in the sense that consumer spending recorded a healthy growth rate in March. On the other hand readings from recent confidence surveys are not so reassuring, since they show a decline in overall consumer confidence. Lastly, vis-a-vis the employment situation, we always need to remember that this is a lagged indicator and indeed if capex were to be on a sustained downward trajectory we could expect this to show up later in the employment statistics too. So, the US economy is far from being out of the woods yet in terms of the risk of a hard landing as the housing correction still retains the potential to spill over to the real side of the economy. More importantly, however, for the notion of de-coupling; in either case how will the other economies of the world fair?

This issue is explored in some detail by the IMF, and I will not here go into the detail of the relevant chapter (see original link above), but will rather point to the two traditional and thus most debated spillover linkages from the US slowdown. The first concerns financial markets and here it is clear that the correlation and thus spillover linkages are very strong, especially in equity markets. This aspect is dealt with in more detail in the context of Europe by Wolfgang Munchau over at Eurointelligence where he argues that it is the spillover in financial markets rather than trade linkages which we should worry about in Europe. I only conditionally agree with this view.

In the first place we need to bear in mind the fact that there is no real substantial evidence that financial markets are about to crash in any meaningful sense of this word. In principle there can be no doubt about the strong linkages in equity and credit (risk) markets, but my issue with Munchau here is that the wealth effect - and especially from equity markets - is not that strong (in general), and especially not in Europe, which suggests that the real effect on the economy would probably be modest even do see rising volatility and some sort of correction.

The wealth effect from housing as an asset is probably potentially somewhat stronger both in the US and in Europe, and this does point us to another potential spillover from a US slowdown which would be an indirect derivative of any financial markets correction. As such, both Munchau and Roubini note that any continuing deflation in the US housing market will lead to a sector and economy wide credit crunch which could spill over into European asset/housing markets and if this were to happen then we would, of course, be in a hell of a bind. But this is really to beg the question as the future outlook for the US housing market is just what isn't clear at this point in time, and hence I am not sure that I buy the argument about a credit crunch spillover. Of course, there is evidence that asset market bubbles, especially in the housing sector, are somewhat synchronous events across economies. But still, I am skeptical that the as-per-usual strong correlation in financial markets also signifies a strong correlation in bursting of housing markets at this point in time.

Regarding the second strong spillover effect of trade linkages, it is important to note that this impact differs markedly from country to country. Indeed, this is perhaps where the major debate on de-coupling is taking place, since it remains unclear as to how well export dependent economies will be able to weather any hard US landing in which consumer spending winds down considerably. In the IMF study the trade linkages between the US and the rest of the world are strongly emphasized and in particular the assymmetrical nature of these linkages. Germany, for example, is often (and with good reason) singled out as a clear example of an export dependent economy does indeed export a great deal to the US, but in fact the big picture story for both Germany and Europe in general is that intra-European trade movements constitute a much more important component in GDP growth.

This fact does not, of course, nullify the importance of the US economy, but it does suggest that the picture is a more complex one. There is also a very important silver lining here in the sense that de-coupling potentially could mean two things from the point of view of an individual economy. On the one hand the export dependant economies could continue to grow in the midst of a US slowdown, but on the other a more important issue would be whether this growth continuation occured on the back of an adjustment in the overall growth path towards more reliance on domestic consumption or whether the export dependent economies are merely 'coupling' onto other importers . In terms of the latter effect, Germany seems to be a good example as is shown in the figure below.

Finally, it is course impossible to discuss de-coupling without thinking about China, since if there ever was a clear example of a strong trade linkage it is the current one between China and the US. Furthermore, while there are some signs that domestic demand is picking up in some key European countries (e.g. Germany, to some extent) and while some countries in Europe are notably running on domestic demand (e.g. Spain, France, UK, Ireland etc.) it is still far from clear whether China can suddenly change course and establish a different growth path which is not heavily driven by investment and exports. Should China slow as a result of a US slowdown (whether hard or soft landing) this would of course also have a global impact in and of itself given the growing importance of China in the overall global economy (14% of global gdp), and given the importance of export growth to China for some of the key export dependent economies . In Japan there are some signs of a mild and very welcome recovery in recent domestic demand but the underlying trend has hardly changed that much, and I would argue that with deflation in core prices looking to be sustained in the first half of 2007 the outlook is far from overwhelmingly positive here too.

In summary, I tend to side here with Stephen Roach and the way he invokes the US consumer as the major test case for global de-coupling thesis. So far, the US consumer has shown little signs of waning and until that happens it will be steady as she goes for a fast growing global economy. Another test will of course be how hard the US economy indeed hits the breaks when faced with an eventual recession, and again here I am skeptical. Ultimately the question of whether the rest of the world can de-couple at this point from any US housing correction and potential severe slowdown in the US economy masks more fundamental questions about the global economy, the driving forces behind the macroeconomic imbalances and thus the potential for the (de)-coupling of regions and economies in a longer term perspective. It is towards these questions that I will now turn.

Looking into the Future - ... towards a rebalancing of the Global Economy?

The structural nature of global macroeconomic imbalances should be well known to readers of GEM and indeed general observers of the global economy but how does de-coupling relate to this. Well, it would not be wholly unreasonable to claim that a sustained process of de-coupling - if this were to occur - would be tantamount to re-balancing. If re-balancing represents the gradual decline of the US current account deficit as a counterpart to a re-balancing of other countries' growth paths this would come very close to the claims by the proponents of de-coupling that the rest of the world now is ready to take up the baton from the US. In many ways this is also true in a global context. In fact, a large part of the world has already de-coupled to some extent, and it is clear that in the future many emerging economies will gradually increase their relative weight in the global economy. This is the part, I think, that Goldman Sachs had right with their now (in)famous notion of the the BRIC countries (although of course the R for Russia should by now perhaps have cruised steadily into the sunset, since this case is rather different from the rest).

However, there are some caveats I feel the need to add about this debate. The first of these concerns the notion of de-coupling in relation to one of the structural pillars of global imbalances; Bretton Woods II. It is important I think to realize the constraints which exist on the potential scope of any re-balancing (and thus de-coupling) in a world where the dollar peggers remain ardent financers of the US current account deficit. In fact, currency movements and trends in monetary policy are good measures through which to examine the viability of a sustained process of de-coupling and re-balancing. As such the current course of monetary policy in the large Central Banks are to some extent consistent with the the de-coupling thesis. The Fed has been on hold since the housing correction began at the end of Q3 2006, while the ECB has continued with its much publicised normalization process. This has of course materialised itself in an appreciation of the Euro relative to the Dollar but the main question remains, how far will/can this go?

What I am driving at here is that we only need to examine the Eur/Usd notch up to become aware that a sudden any serious and sustained decline in the value of the Dollar would, all things being equal, require an appreciation of the Euro and perhaps even the Yen which at the end of the day would be seem to be wholly unrealistic given the economic fundamentals of the Eurozone and Japan.

This is just another reason why I have a hard time seeing how, for example, China would be able to diversify into Euros to any great extent since this would more than likely prompt the ECB to reduce interest rates and thus the yield for which such a diversification would have been justified in the first place. Of course, all this could be avoided if the dollar peggers chose to let their respective currencies float more freely against the dollar as an alternative to the accumulation of dollar denominated debt. Yet, would this really make the imbalances go away? The answer to this question is also the answer to the question of what drives capital flows between global regions and countries in the long run and here I think that especially one account is sorely missing in the mainstream debate.

This consequently brings me to the second caveat in the general debate on de-coupling where I believe that the role of demographics should be attributed much more importance as an explanatory factor of the global economy and thus also the notion of de-coupling. What might demographics help us with here? Well, first of all it should perhaps not be considered odd that demography does not have a very high ranking amongst most economics comentators since demographic variables possess relatively little (if any) explanatory power in relation to short term economic fluctuations and as such whether or not the world will de-couple from the current US slowdown might be considered to have little if anything to do with demographics. I do think however that demographics can provide one indicator of how a de-coupling process (or lack therof) might play out should the US economy really hit a hard landing. So what am I saying here about demographics?

What I am suggesting here is that we look at how demographics and more specifically the issue of ageing affects capital flows in the longer run, and since ageing after all is a global and enduring phenomenon I do not think that it is an unreasonable starting point for exploration. Basically, I am referring to demographics above when I speak of the fundamentals of the European/Eurozone and Japanese economy and why I do not believe these two global economies will be able to bear the burden of global re-balancing and thus sustainable de-coupling where the latter here represents an economy's ability to create domestic demand to, at least to some extent, offset a growth path driven by exports. I have conceptualized this argument on several occasions but perhaps never better than in the case of Japan where capex and exports seem to drive the brunt of net real GDP growth. We should thus ask ourselves whether in the behaviour exhibited by Japan is not in fact endemic to any rapidly ageing economy where capex and productivity cannot be sufficiently channeled into the domestic economy as a result of a shrinking consumption base and whereby the economy reverts to exports in order to grow.

In summary, in this second part of my note I have tried to provide a longer term perspective on de-coupling and global re-balancing. I have argued that there are structural forces at play which hint that what constitutes conventional wisdom perhaps needs to be revised. Specifically, I have argued for the unlikelihood of an imminent dollar crash even if the Fed was forced south by increasingly deteriorating fundamentals in the US economy. Lastly I have argued for the inclusion of the demographics into the discourse on the global economy to a much larger extent than is currently the case.

Summary - Questions, not Answers

In this note, I have explored the notion of de-coupling in an imminent perspective of the US slowdown as well as in a more broad and longterm strucutural perspective. On the former account I positioned myself alongside the consensus skeptics towards de-coupling and most notably, I tend to agree with Stephen Roach that de-coupling will only be tested on the back of a sustained drop in US consumer spending over several quarters. On the latter account I have argued that de-coupling is often not well understood in a structural perspective since it is important to take into account the global imbalances and their structural nature. Moreover, I have argued that de-coupling in a world where Bretton Woods II soldiers on is not justified given the fundmentals of the Eurozone and Japanese economies. Lastly, I have proposed the more formal inclusion of demographics into the general debate on de-coupling and global imbalances and specifically a consideration of how demographics over time might represent a strong explanatory variable in terms of the account of international capital flows.

I leave this note on an open string. I clearly have my perception of the world and others have their's but particularly in terms of demographics I believe the case is strong for more scrutiny as to how population ageing and other demographic variables influence the much debated notions of de-coupling and global imbalances.