European Affairs

Letter from Paris—Back to the Future     Print Email
By Jacqueline Grapin, Founder of The European Institute

jacquelinegrapin2013At the very moment when revelations about François Hollande’s private life were shaking up Paris, his radical political swing to center right policies have created even more surprise--from both supporters and opposition.   Hollande has moved dramatically from his initial course of spending for social benefits and reducing unemployment by creating public sector jobs, and piling on tax increases for businesses, investors, and consumers.   The French socialist president has invited his government to switch gears.

 

“If France hopes to remain master of its own destiny,” said Hollande, “it must recover economic strength.… The time has come to solve France’s main problem: its production.  We need to produce more, and better. Action is therefore needed on supply.”  So speaks the same French President who has promoted “demand policies” since his election.    He insists there is no contradiction because “supply may create demand.”   In any case, his view now is that “what must drive us in 2014 is France’s future.” Are the French now “back to the future?”

Old election slogans from 2012, such as “finance is the enemy” and “salaries over one million euros will be taxed at the rate of 75 %” are heard no longer.    The array of new taxes imposed on businesses, investors and consumers  now  seem to be more a problem than a solution.

On January 14th, François Hollande declared himself a “social-democrat” and warned: “There will be no improvement in the rate of employment if the private sector does not create jobs.” And he said,  “We can only achieve that with the mobilization of all parties, including businesses, without which there can be no long-term job creation.”

This evolution is driven in part by the “under performance” of the French economy. The French government anticipates a rate of growth of 0.8 % in 2014, at best. It is not enough to just reduce the unemployment rate from its actual level of 11 % (against 6.9 % in Germany in 2013) at a moment when 3. 3 million people are officially unemployed in France.   In addition, 650.000 new workers will arrive on the market in the next five years. The official goal is to reduce this rate to “7 or 8 %” in 2018 by creating at least a million new jobs.

The number of new companies created in 2013 fell, and the trade deficit increased, reaching 60 billion euros.   Exports have slowed while the German surplus remains a humiliating reminder to the French that a high level of competitiveness can exist in rich countries.  The revival of Spanish, Italian and Portuguese exports gets increased attention in Paris, while the UK begins to reap the profits of its recent economic and financial discipline.

Several recent studies ordered by the government are projecting that without change, the cost of social benefits in France will reach alarming levels. The budget deficit of the country increased by 3.6 % in 2013, notwithstanding the reduction  (although minimally)  in government  spending. Tax revenues for the State have not been as high as anticipated.   The State budget represents only a third of French public expenses with the rest shared by local government and the cost of social benefits.   The result is a massively increasing deficit. Thus, France is facing the risk of seeing its credit ratings degraded and the cost of borrowing on international markets going up.   In this new year, the time has come to turn the table upside down.

At the center of the President’s new program is a proposed ”responsibility pact.”

“The principle is simple,” it was announced, “reducing the fiscal obligations of businesses, reducing constraints on their activities; and, in return, enabling more recruitment and greater social dialogue”.

Maybe simple to announce, but the program will be complex to implement. Employers insist that, in most cases, they can only hire new workers when they get new orders for their products--something that may take some time, especially given the present level of economic growth. To start with, the government envisages the elimination of taxes based on salaries --around 30 billion euros charged to the private sector for benefits received by the entire society.   New public revenues will be necessary to compensate for this shortage, if it is confirmed. It is out of question to transfer this burden on consumers who are already traumatized by the “fiscal shock” of the recent months.  So, public expenses must be reexamined.  France’s administrative organization will be reconsidered, and modernized. These initiatives amount to a challenging undertaking, as they raise myriad worries among the local and regional political elites. The new program also includes a promise to clarify and simplify the regulatory framework for business with the goal of putting an end to business uncertainties generated by the tax reforms and the zealous reformist spirit of elected officials and civil servants too often changing legislation, regulation, and directions.

Polls suggest that while the President’s rate of approval remains very low (28 %), seven out of ten French people initially support the new “entrepreneur friendly” approach.  The sigh of relief that something is being done is such that even a number of leading members of the conservative opposition say that they will support the new set of policies-- “if they are really implemented.”  This may mean that instead of getting support from his heterogeneous coalition on the left, François Hollande and his government could find themselves in situations where legislative proposals will be backed by a mix from both the majority and the opposition.

Some commentators point to the fact that a large part of the new program announced by the President could be termed a conservative program.  However, one must recognize that the conservative governments have been reluctant to implement such measures when in power in the recent past. It is well known that in France, it is easier for governments from the right to implement policies from the left, and for governments from the left to implement policies from the right. Because the left is economically more vulnerable, it must make more of an effort to keep the economy working. It is also true that the French people, with their famous ability to strike and demonstrate in the streets, race faster to create trouble under conservative rather than socialist governments.

Informed circles on the banks of the Seine are not yet sure whether François Hollande says what he means, or whether he will do what he says. But they agree on at least one thing: the future will tell.   Hollande asked that the French judge him in 2017, at the end of his 5 years term, and not before. However, early readings on public acceptance of the new François Hollande will come in 2014, with the French municipal and senatorial elections, as well as the European elections.