As Greek horse trading over austerity measures continues to dominate headlines, the French have elected their new president, Francois Hollande, amid hopes for a more cohesive response to the country’s economic woes and the persistent problems in the euro zone.

The challenges facing the new president are numerous and daunting. For starters, France needs to reduce its budget deficit, the common problem facing the majority of euro zone economies. Mr. Hollande also must deal with an uncompetitive labor market, a heavily regulated business environment, high government spending as a proportion of gross domestic product (GDP), and a deteriorating trade deficit.

In our view, France’s president-elect doesn’t have a clear plan to deal with the structural issues that have been slowly degrading the country’s economy.

As a percentage of GDP, France’s primary budget deficit is 3.4 percent, the current account deficit is 2 percent and net foreign debt is 11 percent. France’s labor costs are the highest among the large euro zone economies, especially in terms of non-wage costs of employment.
 
To make things more complicated, France is the second most closed economy in the euro zone after Greece, which means the French have not been able to reap the benefits of the common currency, at least not in proportion to the size of their economy.
 
As you’d expect from the Socialist party’s standardbearer, Hollande’s pre-election promises entailed an all-out attack on the owners of capital. Given the rising power of the left in France and with parliamentary elections scheduled for mid-June, he’ll have to follow those campaign promises for now.

If the French vote is to be taken at face value, the people voted for higher corporate taxes, increased taxation on bank profits, separation of retail and investment banking, control of bonuses among bank executives, and an increase in the top personal income tax rate to 75 percent. Moreover, payroll contributions for social programs also will increase. The latter, of course, is a perennial goal for any Socialist worth his salt.

To be sure, not all of Hollande’s ideas are bad, notably the separation of retail and investment banking. However, France’s problems are structural and can’t be easily solved by Hollande or anybody else.
Even outgoing President Nicolas Sarkozy had difficulty dealing with these issues and was unable to even deliver on simple promises, such as ending the 35-hour workweek or opening up so-called “closed” professions such as taxi driver. In the end, Sarkozy had one of the worst records in Europe on deregulation.
 
Likewise, President-elect Hollande probably won’t deliver on the majority of his purely “Socialist” promises. Cutting deficits by raising taxes hasn’t worked before and it won’t work now, especially with France’s government spending currently at 56 percent of GDP.
 
Hollande won’t be able to stick to the country’s current fiscal targets, as he has promised, while also meeting his other promises, which include reducing the pension age from 62 to 60, avoiding layoffs in the public sector, and implementing €20 billion in social spending. France has entered the crisis with an anemic average GDP growth rate of 0.5 percent for the last decade, better only than Italy’s among the big euro zone economies.

That said, the French economy enjoyed strong GDP growth last year of 1.7 percent, while beating its fiscal target. In addition, households have a solid savings ratio of 16 percent, always a big positive during downturns. Problem is, very few things will change in France, because the perilous state of the euro zone doesn’t allow for the expensive social experiments touted by Hollande.

Hollande’s name may be Francois, but this is not the 1980s and he is not Mitterrand. Even so, he was an advisor to the Mitterrand Presidency and he doubtless remembers that the biggest contribution the latter made to France’s future was to bring it closer, politically and economically, to Western Europe.

Bastions of Stability

Given the short- and long-term challenges facing developed economies, emerging markets appear to be relative bastions of stability and growth. This is particularly the case for the larger emerging-market economies in Asia, which boast the fundamentals for solid growth, combined with low levels of sovereign debt.

The Global Investment Strategist endeavors to follow markets the world over, but Asia is the primary focus of this publication. The logic for this emphasis is simple: Asia is the engine of global economic growth and will continue to drive growth for years to come. The global economy is undergoing a momentous shift in power from West to East. It’s not a smooth process, but it is irreversible.

The region has booked nothing short of a stellar performance since the dark days of the 1997 Asian Financial Crisis. In the intervening years, Asian economies have found themselves on solid ground. A little more than a decade ago, Asia’s economies suffered from current account deficits. Now the majority of these economies boast current account surpluses.
 
The financial crisis of 2007-09 revealed Asia’s strength, surprising even seasoned economic pundits. The region’s debt levels are far lower than those in the developed world. Asian economies declined less than expected during the crisis, but also bounced back faster than most “traditional” investment theorists had forecast.
 
The view here remains that Asia (excluding Japan) is experiencing a long-term bull run that commenced at the market bottom of 1998. This means that the current weakness in Asian markets is an opportunity to buy into the most powerful investment story of our time.

As always, we recommend that investors diversify their portfolios, and also hedge part of them. Furthermore, when buying stocks recommended in The Global Investment Strategist Portfolio, remember that our holdings are ranked in order of preference.