Electorates cannot have it both ways Does the relatively calm bond market response to François Hollande's victory in the French presidential election mean that even bond vigilantes have come round to the idea that more growth and less austerity in the eurozone might be a good thing? Certainly there have been signs recently that investors have lost patience with mindless austerity. Yet as Olivier Blanchard, chief economist of the International Monetary Fund, remarks in the IMF's latest World Economic Outlook, markets tend to want it both ways. They demand fiscal consolidation but react badly when that leads to lower economic growth. The markets are not alone. In effect the French electorate gave Mr Hollande a mandate to do what cannot be done. It appears to want growth, along with an old fashioned tax and spend strategy, plus a reversal of globalisation, with everything, please, to stay the same. So, too, with Greece, where polls suggest that more than 70 per cent want to stick with the euro, but the anti-austerity electoral outcome makes it more likely that the country will find itself in the eurozone ejector seat. Indeed, the question is not so much whether it will happen, as how much contagion will ensue across the eurozone when it does. For Greek politicians the job description is mission impossible. As for the managers of the world's $10.2tn official foreign exchange reserves who have to take a strategic view of currencies, this apparent shift in political emphasis in Europe is potentially unnerving. For while it is true that debt sustainability in the eurozone will be impossible without growth, Mr Hollande's recipe is not really pro-growth. France, after all, has a competitiveness problem vis a vis Germany in terms of unit labour costs and it needs to raise its underlying growth rate. Its problems are compounded by the small size of the tradeable sector of the economy, which means that it takes relatively large price adjustments to achieve external balance. That points to the need for a powerful supply side programme and for a shift of resources from the public sector to the export-oriented parts of the private sector. Yet Mr Hollande is promising a big increase in state sponsored jobs and a bigger French state, which already spends around 58 per cent of gross domestic product. He is set to reverse the very modest increase in the pension age engineered by Nicolas Sarkozy, a form of recidivism that carries a dangerous symbolism in the midst of a sovereign debt maelstrom. And in today's uncomfortably globalised circumstances, his proposed increases in taxes on higher incomes could amount to a policy of tax the rich and wish them goodbye. The risk is that growth will prove elusive, while tax revenues fall short of target. All of which underlines the quixotic nature of Mr Hollande's declaration that his true enemy is finance when he has a potential budget deficit of 4.4 per cent of GDP to finance this year and a public sector debt to GDP ratio of more than 83 per cent. Maybe the markets will continue to give France the benefit of the doubt for a little longer. Yet it is a safe bet that France's influence within the European Union will continue to wane relative to Germany. Whether a weaker France will lead to a weaker euro is much less easy to predict. Despite the supposedly universal desire of foreign exchange reserve managers to reduce their exposure to the dollar, the euro has been declining as a percentage of official foreign exchange reserves for which the IMF knows the currency composition. It has gone progressively from 27.7 per cent at the end of 2009 to 25.0 per cent at the end of last year. The dollar meantime has remained at around 62 per cent of the total for the whole of that period. The chief gainer, recently, has been the Japanese yen, whose share stood at 3.7 per cent in the fourth quarter last year, compared with 2.9 at the end of 2009. At such a low percentage of reserve management portfolios, the yen risks being penalised by the eurozone's troubles. That in turn emphasises the investment dilemma. As the Japanese economy becomes less competitive on the back of an appreciating currency, the more intractable its huge public sector debt appears. So none of the world's main reserve currencies - dollar, euro, sterling, yen - is free of sovereign debt concerns. And the gold market is dwarfed as never before by the size of official reserves. There are times in any given market when every bet looks awful. In currencies, that has been true for some time. But I will be surprised if the euro does not now see further relative decline.