Can Europe Have Austerity AND Stimulus?

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More uncertainty. That's what the French elections mean. Here's a few questions I've been asked all day.

1) Will there be a big change in French government policy?

The Socialist candidate, Mr. Hollande, says he wants to emphasize growth. Angela Merkel will not have a problem with that.

2) So what's the problem?

The devil, as always, is in the details. He wants to change the mandate for the ECB, to move toward the U.S. Fed's dual mandate — employment and inflation, not just inflation.

This is a back-door way for more U.S.-type stimulus, And he is going to get negative feedback from the Germans, specifically the Bundesbank. But all 27 members of the EU would have to agree to the change, so it's unlikely something like this will pass.

But the other proposals he has floated, including more taxes (a 75 percent tax rate on people making more than 1 million euros a year ($1,300,000), among other things), are not sitting well and most would consider anti-growth. But you have to pay for stimulus somehow.

3) What will happen to the proposed new eurozone fiscal pact?

No one knows, and that is a problem. The new treaty would enshrine tougher budgetary discipline on the eurozone. For better or worse, it has become a symbol of the eurozone's willingness to reign in excessive spending. There are reports floating around that the German parliament might delay its own ratification process until it's clear what is going to happen in France (Mr. Hollande is opposed to the treaty).

If there is a public statement to that effect, it will likely hurt markets more. If the Germans don't want to have a vote, who will?

4) Is there a "Grand Compromise" that could be reached?

That's what everyone is groping for. Here's one: pass the fiscal austerity treaty, but at the same time include some kind of "growth initiative" that is complementary. How to pay for stimulus? How about reviving a tax on financial transactions? Remember that one? I know, a disaster for trading. But that's where things are headed.

Like I said, you have to pay for stimulus somehow.

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