French economic policy
Which way for Mr Hollande?
Elected on the left,France’s president seems to be veering towards the centre
THE longer Francois Hollande spends in office, the more it takes sharp eyesight and a clear head to follow his economic policy. Since his election last May, the Socialist president has mixed tax-and-spend measures with efforts to improve competitiveness. The rich feel squeezed; firms are annoyed by anti-business talk. Yet,with GDP shrinking in the fourth quarter of 2012 and job losses mounting, the man elected on a leftist programme is accused of a swerve to the reformist centre. What is Mr Hollande up to?
In his first few months he ticked off items on his manifesto. He lowered the pension age for certain workers. He raised a family benefit. He capped petrol prices. He vowed to stop companies closing factories. He prepared a budget for 2013 that tried to keep the budget deficit to 3% of GDP, but chiefly through tax increases: it soaked the rich with a 75% income-tax rate, and hit companies and individuals with other higher taxes. Returning from his summer break, Mr Hollande seemed like a man with the luxury of time on his side.
What followed in October was, therefore, sprung on an unsuspecting public. After a damning report on French competitiveness by Louis Gallois, a left-leaning industrialist, Mr Hollande announced 20 billion euros of tax breaks for companies employing low-wage labour, to compensate for high social charges. A sense of urgency and realism began to creep in. Mr Gallois talked of an “emergency situation”. For the first time, the government acknowledged labour cost as a factor behindFrance’s loss of competitiveness to Germany over the past ten years. Mr Hollande even started talking of cutting public spending, which accounts for over 56% of GDP. This was followed in January by an unexpected agreement with the unions to soften labour-market rules, making it easier for companies to reduce hours and wages in a downturn.
In some ways, all this was just an inevitable encounter with economic reality. Mr Hollande had based his manifes to on growth in 2013 of 1.7%; in office, he revised this to 0.8%. Now the fantasy is over: this week Mr Hollande conceded, like most economists, that growth would be much lower. As a result, said the Cour des Comptes, the national auditor, in its annual report on February 12th, France has “little chance” of meeting its 3% target.
Across the country, factories have been closing. Industrial production has stalled. Entrepreneurs feel penalised. Investment plans are on hold. Anecdotes abound of rich families leaving the country. Faced with this, and with poor poll ratings, Mr Hollande has begun to recognise the limits of state power, and of a tax-and-spend policy in a country that breaks records for both. Now Jean-Marc Ayrault, his prime minister, wants “to reinvent the French model”. Pierre Moscovici, the finance minister, even claims there has been a “Copernican revolution” on the left. By conceding the need for supply-side measures to reduce labour costs, he says, the French left has made a big shift. Indeed. Some say that those around Mr Hollande in charge of economic policy, including Mr Moscovici, Michel Sapin, the labour minister, and Emmanuel Macron, the economic adviser in the Elysee, have long understood what is really needed to solve France’s competitiveness problem.
The trouble is that the rest of the Socialist Party, particularly in parliament, does not agree. Manuel Valls, the popular straight-talking interior minister, says that “The challenge for the French left is that we should have done this ideological metamorphosis during the past ten years of opposition.” Instead, “We are adapting our software while in office.” With its deputies supplied largely by the public sector, this is awkward. Already, the left accuses Mr Hollande of giving in to “neo-liberal principles”. Thierry Lepaon, the new leader of the Confederation Generale du Travail, France’s biggest and communist-linked union, complains that he is doing “the opposite of his campaign commitments”.
In reality, it is hard to detect a linear evolution, let alone a revolution. For one thing, Mr Hollande is a political animal who plays by the rule that it is better not to say too clearly what you are doing. He refuses to acknowledge a U-turn. He let Arnaud Montebourg, his industry minister, talk of the compulsory nationalisation of a steelworks, before ruling it out. He has pinned himself into a corner over the 75% tax rate, which was ruled unconstitutional in December, but which he cannot entirely bury without losing face.
It is also far from clear that Mr Hollande, even if he sees the need to curb public spending, is ready to do it. In its damning report, the Cour des Comptes deplores the fact that tax rises make up three-quarters of 2013 budget savings, and urges a greater effort to cut spending. But this will require an overhaul of pensions and welfare spending, as well as civil-service staffing, none of which is on the table.
Mr Hollande could yet turn out to be a Gerhard Schruder a la francaise, willing to bring in deep reforms, as the former centre-left German chancellor did, to shake up the French welfare state and restore competitiveness. But a more likely outcome is that he will do just enough to keep the markets and the ratings agencies at bay, without ever fully confronting vested interests. “Whenever he can avoid hard choices, he will,” says somebody who knows him well. This may keep France from disaster. Whether it will reverse the slow decline of the past decade is far less certain.