Interesting article by The Economist:
Blink and you will have missed it. France’s Socialist president, François Hollande, who was elected in 2012 to bring an end to austerity and to tax the rich, has turned into a liberal. Or at least a social-liberal. This term, in the lexicon of the French left (and much of the right), means believing in a low-tax, low-public-spending doctrine and is hence a political insult. Yet such seems to be the general conclusion after Mr Hollande’s televised new year’s address on December 31st, which took the French public by surprise.
Three points stand out from Mr Hollande’s short message, which he will now spell out in a series of speeches. The first is a confession that he underestimated the depth of the recession. Voters have become exasperated by his mix of defiant optimism and disingenuity. He claimed a year ago that the euro-zone crisis was “behind us”, and his government stuck for months to exaggerated growth forecasts. Most irritating of all to voters, Mr Hollande claimed that unemployment would drop by the end of 2013; when this looked absurdly unrealistic, he vowed instead to “invert the trend”, a semantic contortion by which he meant stopping the total rising, something that has yet to happen either. A little less denial and a healthy dose of realism may thus be welcome.
A second point is Mr Hollande’s unambiguous statement that taxation in France has become “too heavy”, and that this is deterring job creation. At over 45% of GDP, France’s tax take stands with Belgium’s as the highest in the euro zone. For most of the French left and a chunk of the right, high taxes are a hallmark of a decent society that puts fairness before profit, and public services before business. Mr Hollande famously promised during his election campaign to slap a 75% top income-tax rate on the rich—yet his government vowed that nine out of ten households would not be touched by tax increases.
In the event, the 75% tax was thrown out by the Constitutional Council (companies themselves must now pay it in payroll charges for high earners instead). And, to the fury of the squeezed middle, most ordinary people have seen their tax bills rise. Now Mr Hollande seems to concede that this is cramping the economy. He wants a new “responsibility pact” with business: lower charges on workers, fewer constraints on business activity and, in return, more hiring.
A third novelty is Mr Hollande’s blunt promise “to cut public spending”. He now says the state has become “too heavy, too slow, too costly”. The surprise here is that he is making his case not merely on grounds of deficit-reduction. He also said he wanted to eliminate welfare “abuse”, usually a hobby-horse for the right, and argued that the point of spending cuts was “in time, to lower taxes”.
For French Socialists, this is close to heresy. Most of them, either stunned or forewarned, seemed speechless. But Delphine Batho, one former minister, denounced Mr Hollande’s message as an “ideological turning-point” that would lead to the “impoverishment of the state”. Pierre Laurent, the Communist Party leader, accused Mr Hollande of “betrayal”.
It is a measure of how new this tone is that the French right, too, was caught off guard. “Go on then!” urged Valérie Pécresse, a former budget minister. Medef, the business body, welcomed Mr Hollande’s idea of a pact, vowing that 1m new jobs could be created. Bruno Jeudy, a columnist, compared Mr Hollande’s “social-liberal realism” to that of Britain’s Tony Blair and Germany’s Gerhard Schröder. “Is there anything Socialist left in him?” asked Le Monde, a left-leaning newspaper.
For now, Mr Hollande’s plans are short on detail. Much will depend on how far he intends to push his new vision. He says he will bypass parliament and use decrees if necessary. But if he is serious about lowering charges on business, he also needs to make serious spending cuts. These are always harder than tax rises, all the more so given that France faces two elections this year—for local councils in March and to the European Parliament in May—and with Mr Hollande’s popularity at a record low. As it is, “cuts” in the 2014 budget amount only to “savings from more moderate spending increases,” says Philippe Marini, head of the Senate finance committee.
Nor will growth come to Mr Hollande’s rescue. Despite an upturn in much of Europe, France is still weak. Unemployment edged up in November, even after a boost from publicly subsidised jobs. The purchasing managers’ index fell in December for a third month in a row. In the fourth quarter of 2013 zero growth “cannot be ruled out”, says Bruno Cavalier of Oddo Securities. And for 2014 the European Commission forecasts just 0.9% GDP growth in France, against 1.7% in Germany and 2.2% in Britain. The December Euro Plus Monitor from the Lisbon Council, a Brussels-based think-tank, notes that France is the only big European economy beset by serious problems not to have taken bold steps towards reform.
For all the talk of a new Mr Hollande, this is not the first time he has embraced supply-side economics. The political son of Jacques Delors, a moderate Socialist, Mr Hollande invented in 2012 a complex tax credit for firms designed to lower payroll charges by up to 6%. And he said then that the French state must “do better by spending less”. His finance minister, Pierre Moscovici, even claimed that this marked a “Copernican revolution”. Yet this approach has been counterbalanced by extra taxes elsewhere, including higher health-care contributions. This dizzying fiscal zigzag has added to uncertainty at a time when business needs stability to start investing and hiring again. The new year’s words seem encouraging. But this time will Mr Hollande stick to them?