Daily Archives: June 26, 2012

François Hollande has had the kind of month most politicians enjoy once in a lifetime. After an unexpectedly large victory in the Presidential election, his troops followed up with a remarkable triumph in the legislatives, delivering him an absolute majority in the Chambre des Deputes, without the need to compromise with the Left Front or the Communists. The Socialists now control the Chambre, the Senate, and almost all the regions. It is “La Vie en Rose” across the political landscape, for the first time under the Fifth Republic.

Even the well-publicised spat between his current and former partners has not seriously damaged his triumph. After all, Mr Hollande claimed in the campaign that he would be a “normal” President, and it is normal for there to be a hint of domestic trouble at the Elysee Palace.

In Europe, things are not quite so well-ordered. The all-important Franco-German relationship has stuttered, and there seems to be little positive chemistry between him and Angela Merkel. But Mr Hollande nonetheless seems to be on the right side of the argument about what needs to be done to save the euro and stave off recession. He will surely get some response to his call for a growth agenda.

That may well, however, be as good as it gets, and he should bask in his success while it lasts. Because dark clouds are gathering, and the honeymoon is likely to be very short-lived.

The first major domestic problem will be the deficit. The Cour des Comptes, which audits the government’s books, is reviewing the state of the public finances and is expected to deliver its post-election verdict on 2 July. There are strong rumours that it will identify a ten billion euro gap in 2012-13, and an even bigger one the following year, if France is to meet its deficit reduction commitments.

By British or American standards that may seem small beer. In Washington, $10bn can get lost in a pork barrel. But in France cutting public spending is exceedingly difficult, and tax revenues are not buoyant. Furthermore, Mr Hollande was elected on a programme which involves recruiting an additional 60,000 teachers, and reducing the retirement age to 60 for some public servants.

The cost of that latter commitment is not high, but it is a symbol of the French left’s resistance to spending cuts and labour market reform. As French commentators put it, their Socialist party has never embraced “Schroederisation”. (Blairism is “vieux jeu”, if indeed it ever played at all in France). Hollande’s supporters, and indeed the French nation as a whole, are mentally unprepared for the kind of belt-tightening that will soon be needed. So far he has announced an increased tax on dividend payments, but additional business taxes, while popular with his own supporters, are risky. There will be red carpets all over Europe, not just in London, if French corporate taxation gets seriously out of line.

Nor is there widespread public understanding of France’s unfavourable economic trends –- though the Ministry of Finance is well aware of them. The share of manufacturing output in French GDP is in fact slightly below the UK’s, but almost no French politician can believe that, fed as they have been on a diet of French national champions, with Britain portrayed as an offshore financial centre — a kind of Greater Guernsey .

The comparison that matters more, given the constraints of eurozone membership, is with Germany. A decade ago, French GDP per head was 94.5 per cent of Germany’s; in 2011 it was 89.7 per cent. In the same period, and in spite of the effects of the crisis, Spanish GDP per capita continued to catch up. France has a problem of competitiveness, and of industrial capacity, and one which is getting worse.

Mr Hollande, and his new government, will need to spell out these realities, and set a new course. That will not be easy, as the ground has been ill-prepared. With a powerful mandate, and a solid parliamentary majority, he can afford to make some tough decisions. We will find out very soon whether he has the will to do so.

Related links:
France’s bling bling era is nearing its end – Howard Davies
What to expect from François Hollande – Philippe Aghion

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