After a brief reprieve earlier this year, Europe's financial crisis has returned to the forefront of the market's consciousness.
Following a week where Spain was top of mind, this weekend brings two additional events that could have major ramifications for the future of the EU: The IMF/World Bank meeting and the French presidential elections.
In the accompanying video, I discuss these developments with Martin Wolf, chief economics commentator at The Financial Times and one of the world's foremost financial journalists.
Of the two events this weekend, Wolf says the French elections are more important for financial markets.
"It's potentially a very significant moment," he says, citing current polls showing Socialist Party candidate Francois Hollande leading French President Nicolas Sarkozy in an anticipated second-round matchup. (Sunday is round one, with the top two vote-getters moving on to a second-round runoff on May 6, assuming no single candidate gets 50% of the vote in round one.)
As a candidate, Hollande has called for a top marginal tax rate of 75%, publicly chided the European Central Bank to do more to spur growth, and said he would seek to renegotiate the EU Fiscal Compact Treaty. The compact, which was approved in January, obliges EU members to keep budget deficits below 3% of GDP and keep public debt at 60% of GDP.
Should he win the presidency, Wolf believes Hollande will "come into line" and move toward more centrist policies. "But there could be quite a bit of excitement on the way and the eurozone really could do without more excitement than it already has," he quips.
Particularly "exciting" would be the not-unthinkable possibility Hollande's government would need to form a coalition with the Leftist Front party, whose standard-bearer Jean-Luc Melenchon is currently polling at around 20%. Melenchon wants to abandon the Fiscal Compact altogether and impose a 100% tax on earnings above $480,000. (And you think there's class warfare and populist rhetoric in American politics?)
Should Hollande embrace such policies "it could lead to a crisis in the French bond market," which could become "unmanageable," for EU policymakers, Wolf says.
The good news is Wolf believes this worst-case scenario will be avoided and more broadly believes the euro will survive, describing the EU as a "miserable marriage" that will nevertheless endure.
The other news is Wolf expects IMF chief Christine Lagarde will get her request for at least $400 billion, which would double the fund's lending capacity.
Wolf supports the idea of the IMF having a larger insurance fund, so countries won't need to hold as much currency reserves but thinks it should be more global in nature.
"To put it all into Europe? That looks to me like a very dangerous game for the IMF," he says. "They've made quite clearly some serious mistakes getting so involved in a political project they don't really control."
- Francois Hollande