5.08.2012

What are the Prediction Markets Telling Us About the Hollande Victory?

Over the weekend, Francois Hollande, as expected, won the French presidency. As a member of the Socialist party, some have speculated that he will break with 'the plan' calling for austerity which European nations have agreed to. While this would put France at odds with other nations, including close friend Germany, Hollande wasn't elected to stick with the status quo, and he may feel that he has the political capital to put government spending measures in place. This has led to such jitters among pro-austerity alarmists that I thought I might check in with Blawgconomics favorite Intrade to see what (hypothetically) more rational punters thought about Hollande's victory and what it might mean for the future of the EU:

- The odds that any country currently using the Euro will announce an intention to drop it before the end of the year are predicted to be less than 30% and were steady after the election.
- Those odds rise to 48% at the end of next year and 57% when the horizon is extended to year-end 2014.
- The odds of any of the current European whipping boys being declared in default by the end of the year have been declining of late.
- While the odds are low (2.5%), people have been betting slightly in favor of the idea that Germany could lose its AAA credit rating by year-end.

While these (admittedly limited) results are decidedly mixed they by no means do they suggest that people think the sky is falling. In addition, markets around Europe, including in France, closed higher Monday (though lower today...). This was after Hollande made campaign promises to raise taxes on corporations and high net worth individuals to pay for his spending plans. Maybe shareholders are buying into the old saw that politicians will say anything to get elected and don't really believe that there will be taxes increases biting into profits any time soon?

More likely there is optimism after the wrapping up of what many perceived was the lame duck presidency of Nicolas Sarkozy. And perhaps it reflects a positive reaction to the idea of state spending in the face of a more austere German/British measures. EU proponents should hope that such optimism has a foundation in reality; if things go wrong in France, it isn't only the French who will suffer.

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