Before he goes after his enemy, Hollande will need to make good on some socialist policies, which could have spillover effects on the rest of the eurozone. He says he will raise the minimum wage, cancel scheduled spending cuts, hire back thousands of government workers and roll back the retirement age from 62 to 60. He also wants to increase government spending to sponsor large infrastructure projects - all in a bid to spur economic growth.
To pay for this, Hollande wants to tax France to death. Anyone making more than a million euros a year will see their tax rate go from 45% to a mind-blowing 75%. He'll then stick it to the banks, raising their taxes by 15%. In addition, he wants to implement a financial transaction tax, which could have dire consequences on France's already weak financial sector. The tax would hurt high frequency trading, wiping out a major profit center for some hedge funds and banks that operate in France. It would also hurt the competitiveness of France's broker-dealers in executing transactions.
To avoid financial firms from leaving in droves, Hollande will most likely push for the tax to be implemented across the European Union. While the UK has successfully blocked attempts to implement a transaction tax in the past, Hollande isn't likely to give up as easily as his predecessors. The French could back the UK into a corner on a number of other political issues to get its way on this one. Wall Street will be watching closely given the Obama administration's view that financial rules and restrictions should be harmonized on both sides of the Atlantic. The fear is that France's financial transaction tax could eventually go worldwide.
Socialist France could also impact the implementation of new international banking standards, known as Basel III. In Brussels, European finance ministers are currently discussing how they will collectively implement new rules that will eventually force banks to hold more capital on their balance sheet. A France run by Hollande will most likely push for a higher rate, jeopardizing the lending capacity of European banks. Any agreement made on Basel III by the Europeans will have a big influence on the rate that ends up being the international standard. Wall Street is in favor of a low rate so banks can invest more of its cash. A high rate would further restrict bank lending – hurting not only bank profits, but also the U.S. economy.
Hollande's war on finance could be limited to tougher regulations or higher taxes, but there is a real fear that he could take it too far. During Wednesday's debate he noted his discontent with the one thing that is holding the euro together– cheap funding from the European Central Bank. He scornfully said, "banks get a loan from ECB at 1% and lend at 6%. I refuse."
This seemingly innocuous statement went largely unnoticed by many watching the debate, but it probably set off alarm bells in several European capitals. That's because this pass through of cheap funding from the ECB is the only thing keeping Europe from totally falling apart. The money the ECB is essentially printing is being lent to banks on the cheap so they can turn around and buy sovereign debt. This allows European countries on the periphery to continue funding themselves, avoiding default and a eurozone meltdown. It also allows the banks to lend more to businesses and consumers in order to increase spending in the economy. The spread the banks earn helps to fill the massive holes in their balance sheet so that they can recover from the crisis.
