The French election could spell the end for the euro

There's far more to the French elections than simply choosing France's next president, says Matthew Partridge. The survival of the euro could be at stake.

Ever seen the film Groundhog Day? Bill Murray plays a weatherman who ends up repeating the same day over and over again.

It's a lot like the European crisis. Whether it is Spain, Portugal or Greece, the story is the same rising bond yields lead to some stop-gap measures and a pledge to cut spending.

The difference between the eurozone saga and the Bill Murray film is that the film is funny -and it has an ending -whereas Europe's countries just keep postponing the inevitable.

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At some point,the weaker countries will have to default and devalue, and bondholders will have to take huge losses.

There are so many things that could start this particular ball rolling that's its hard to count them all.

The approaching Greek elections are likely to deprive the two pro-bail-out parties of a majority. Madrid and Lisbon may throw in the towel on austerity. Ireland could vote down the fiscal treaty, or simply decide that it is not able to pay debts that are nearly 145% of GDP. There has even been talk about Holland leaving the eurozone.

However, the final act of the eurozone drama could start in France.

Here's how it could happen and why you should bet against the French market.

The French elections could signal the end of the eurozone

However, the kozy' half of the duo's days could be numbered. The economic outlook for France is grim: unemployment is at 10%, while even the government admits that growth will be no more than 0.5% this year.

This means that Sarkozy may well be voted out of office in May.

Of course, he's not going down without a fight. He has tried to appeal to far-right Front National voters with his stances on trade and immigration. He's also even got Merkel to appear on the campaign trail with him.

However, despite all this, the latest polls put him 14 points behind his main opponent, Franois Hollande. And aHollande victory could be bad news for the eurozone.

In March, finance ministers signed a fiscal pact which made it much harder to run up debts. The hope is that this will convince bond markets that there won't be a repeat of the Greek 'voluntary haircut'.

However, some pundits have pointed out that cutting spending in the depth of a recession will make the downturn even worse. They have a point, and Hollande agrees: he has pledged to change the pact to make it much looser.

It's easy to be cynical. After all, he hasn't said that he'll tear it up, so he could keep his promise by getting other countries to agree to a few minor changes. And since the treaty only needs the support of 12 countries, France's views technically don't matter.

However, his other policies suggest that this isn't just an act.

Hollande's key policy is to cut the retirement age for many workers to 60. Since this would cost a lot of money, he will also raise taxes. The top rate would rise to apunishing 75%. He has also said that he will hit larger firms with tax rises.

The problem is that such a high income tax rate would discourage enterprise. There's also a good chance that it will not raise enough money. As tax rates increase, people have less incentive to work. Beyond a certain taxation point, the tax take starts to fall. While the exact point of maximum revenue is up for debate, everyone agrees that it is less than 75%.

Yet Hollande may be forced even further to the left. Jean-Luc Mlenchon, who wants a top tax rate of 100% and a blanket return to 60%, has been gaining in the polls. While there is little chance of him winning, Hollande will need to win over his supporters to win the run-off (the French election has two rounds). This will mean more rash promises, and possibly ministerial positions for the far left as well.

A Hollande victory will leave Germany as the only major supporter of austerity. While this may be good for growth, bond markets will hate it, which will speed up the euro's demise.

Things look bad for France regardless of what happens

A euro with fewer members is likely to strengthen, which would hurt exports. Those countries that remain may also still have to make payments to the former members. Like Berlin, Paris could also find itself with a large bill for bailing out banks 'encouraged' to buy sovereign debt.

While Sarkozy has done a few things right, such as raising the French pension age and ending the 35-hour week, his general record on reform has been poor he's no Mario Monti. Even if he pulls off a shock victory, the further economic changes that France needs are unlikely to happen.

Overall, the outlook for theFrench economy- and French firms - makes the market's price/earnings ratio (p/e) of 11 seem high, rather than cheap. So we'd avoid the French stock market, the CAC 40. If you've an appetite for risk and you are happy to engage in a bit of short-term trading, you could consider shorting the market.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri