Francois Hollande, Socialist Party candidate for the 2012 French presidential election
European stocks plunged Friday on fears a victory by the Socialist candidate in France's presidential election could upend prospects of setting the continent's second-largest economy on a sound footing.
Polls on the likely outcome of Sunday's election show Socialist candidate François Hollande well ahead of incumbent Nicolas Sarkozy, who has taken steps to trim the growth rate of the nation's debt. Among his initiatives has been raising the retirement age to 62 from 60 and attempting -- with limited success -- to curb the growth of the state.
Nevertheless, after five years of Sarkozy's center-right administration, France has a record debt of $2.24 billion and unemployment has risen to a 13-year high of 10 percent.
Further, France's cost of borrowing remains stubbornly high, around 2.79 percent for a 10-year bond compared to 1.61 for a similar German bond.
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Hollande, who's leading by about five percentage points, has vowed to shift France's fiscal strategy from austerity to growth. Among other things, he promised to renegotiate a deficit-cutting plan, raise the minimum wage and raise taxes on the wealthy.
The likelihood that France will have its first socialist president since 1981 unnerved investors, who knocked down the CAC 40 index on Friday 1.93 percent. Since March 16, the CAC 40 index has lost 11.9 percent.
Stocks across Europe also fell Friday. Germany's DAX dropped 1.97 percent and Britain's FTSE 100 tumbled 2.02 percent.
While investors responded to an apparently imminent Hollande victory by selling shares, economists responded with public warnings.
"If France (elects Hollande), the fate of the entire eurozone could be at stake," French economist Christian Saint-Etienne told the Wall Street Journal.
Business consulting firm Capital Economics said a Hollande victory wouldn't be a disaster but it would be a setback.
"A victory for François Hollande in the French election, the most likely outcome, would be seen as a boost for those advocating a more growth-friendly solution to the eurozone's problems," Capital Economics said in a note.
"But Hollande's fiscal plans are only marginally less onerous than President Sarkozy's and his economic plans are unlikely to boost economic growth in the longer term. What's more, it remains to be seen whether he has the strength of character to achieve significant economic policy changes at a eurozone level."
Also Friday, an open letter signed by 21 French economists and published in the Wall Street Journal pleaded with France's 43 million voters to not put Hollande in office.
"Whatever happens on Sunday seems unlikely to deliver France from socialism -- our choices range from the status quo of a statist right, to the grand visions of a more-statist left," the letter said.
"There is only one solution to restore hope to France: Abandon socialism entirely. To let it grip us even more tightly, as Mr. Hollande promises, would be a fatal error."
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