By SARAH DiLORENZO, Associated Press
PARIS (AP) — France's stock market moved deep into the red Monday and the euro tumbled after the Socialist candidate came out on top in the first round of the country's presidential election, raising questions about whether the markets are nervous about a Francois Hollande victory.
But analysts caution that a nearly 3 percent fall in the country's CAC-40 index and a 0.5 percent retreat by the euro against the dollar may have more to do with worries about Europe in general than fears of a left-wing resident in the Elysee Palace.
For one, while most polls had predicted Hollande would come out slightly ahead of President Nicolas Sarkozy in the first round, a strong showing by the far-right candidate came as a surprise. Hollande took 28.6 percent of the ballots cast Sunday and Sarkozy 27.2 percent; anti-immigrant firebrand Marine Le Pen came in third with 17.9 percent
That injects an element of uncertainty into the May 6 second round, and markets hate uncertainty.
Another reason for caution in analyzing the slide is that the French elections weren't the only thing focussing investors' attention Monday. A key survey of economic activity in the eurozone fell, suggesting that the economies of the 17 nations that use the euro are going to struggle to eke out growth this year.
On top of that, the Dutch government quit Monday after negotiations on a new austerity package fell apart. That's an indication the French aren't the only ones bristling at spending cuts.
Last, many economists have pointed out that neither of the leading French candidates has a strong program for restarting growth, reducing an unemployment rate of near 10 percent, and cutting a deficit that's more than 5 percent of GDP. Both have promised to balance France's budget — Sarkozy by 2016, Hollande a year later — but they were less clear on how those savings might be achieved, as they made promise after promise in the campaign season.
"To be honest, neither presidential candidate offers the kind of reform needed to get France back to economic success," said Louise Cooper, an analyst with BGC Partners. "Without growth, current debt becomes unsustainable and without reform, growth is hard to achieve."
Sarkozy has failed to push through many of the reforms he promised would modernize France's economy in his first five-year term. Meanwhile, the fact that many of the campaign promises from both sides tapped into a nostalgia for a more protected past — when French workers could count on elaborate benefits and an early retirement — also raise concerns that reform in France may still be some way off.
In fact, investors already appear to "pricing in" this idea that France won't be making the same efforts that, say, Italy has committed to. Cooper notes that France's borrowing costs — one indication of how healthy investors think a country's finances are — are higher than other countries in Europe's more fiscally responsible "north."
On Monday, the yield, or interest rate, on its 10-year benchmark bond traded around 3 percent — where it has been for weeks. In Germany, by contrast, the yield is 1.64 percent, while it's 2.42 percent in the Netherlands.
Still, markets do move on hunches and perceptions, not just hard facts, and the idea of France swinging to the left — which traditionally means more spending — could be driving some of Monday's fall. There are also questions about what sort of relationship a President Hollande would have with German Chancellor Angela Merkel, whom Sarkozy is particularly close to. The French-German partnership was seen as crucial to negotiations on a solution to Europe's debt crisis.
Hollande has said he will push for Europe's hard-fought fiscal compact — designed to limit government overspending — to include more growth measures. While reopening that painful debate could rock the relative calm that adopting the compact has achieved, Hollande's idea is not a radical one. Many economists have expressed concern that Europe is tacking too hard toward austerity, sacrificing all-important growth in the process.
On Monday, German Finance Ministry spokesman Martin Kotthaus resisted any notion that a change of president in France would alter Europe's course.