reflections

The French President Reverses Stance With New Economic Reforms

5 MINS READJan 16, 2014 | 02:06 GMT
(Stratfor)

A year and a half after winning the presidential election, French President Francois Hollande is trying to regain the political initiative by announcing new policies to address the effects of the European economic crisis. In a series of announcements that baffled both the ruling center-left and the opposing center-right but were praised by the European Union on Jan. 15, Hollande promised substantial spending cuts and lower taxes for companies. While his speech focused on fiscal reform, it had a clear political angle: In May, the French will hold municipal and European elections, and the ruling Socialists will probably be defeated in the context of growing social unrest due to a stagnating economy and pervasive unemployment.

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On Jan. 14, Hollande held the third press conference of his presidency. In his usual somber tone, the French leader announced a tax cut of 30 billion euros ($40.8 billion) for companies, achieved by phasing out family welfare payroll charges between 2014 and 2017. He also announced his administration would cut public spending by 50 billion euros between 2015 and 2017 on top of the 14 billion euros that would be cut this year. Finally, Hollande promised structural reforms to "redefine the role of the state," which could include reforms in France's administrative divisions.

These measures have puzzled Hollande's Socialist Party and former President Nicolas Sarkozy's conservative Union for a Popular Movement. Members of Hollande's Cabinet had to perform rhetorical acrobatics to deny that the president was adopting conservative policies. Things are equally awkward for the opposition. Some of Hollande's promises belong to the agenda of any center-right party, and members of the Union for a Popular Movement struggled to offer solid criticism to the president's announcements. Ironically, Hollande's speech unified the far left and the far right, which denounced the measures, saying that the president was giving in to pressure from corporations and financial markets. The reaction of the business community was mild; the leader of French business lobby MEDEF praised the announcements but demanded more details.

In any case, Hollande's speech was an admission by the Elysee that high labor costs and strong public spending are hurting the French economy. During the presidential campaign, Hollande promised to balance France's finances and reduce unemployment by raising taxes and applying structural reforms while avoiding the kinds of austerity measures that the European Union was demanding of countries in southern Europe. Eighteen months later, unemployment keeps rising and the French economy moves in and out of recession without substantive growth. The French are getting increasingly restless, as the emergence of protests movements such as the Red Caps illustrates, and support for the government is eroding fast. Opinion polls show that the nationalist National Front, which advocates leaving the eurozone and applying protectionist measures, will probably have a record performance in the municipal elections in March and European Parliament elections in May.

Hollande has significant challenges ahead. So far, the president has managed to keep dissent within his party at tolerable levels. But his announcements are creating unease within the left-wing factions of the Socialist party, and the public's disapproval of the government has also led to an internal competition between Cabinet members to replace the unpopular Prime Minister Jean Marc Ayrault. Political frictions within the Elysee are likely to become stronger if the Socialists are defeated in the municipal and European elections — a likely prospect at this point.

The French government will also have to make an additional effort to prove its commitment to the reforms. France has traditionally struggled to reduce its deficit because reductions in public spending are often met with resistance from the population, especially if they affect healthcare, education or social benefits. Opinion polls show that most French citizens understand that reforms are needed, but it is still unclear if the French will accept them passively. In addition, it is unclear to what extent the announced reforms will actually be implemented or if they will have a significant impact. In the coming weeks, Paris will probably focus its efforts on explaining its proposed reforms to companies, unions and voters.

With his speech, Hollande has sought to show that he understands France's problems and has plans to generate economic growth. In the mid-1980s another Socialist president, Francois Mitterrand, was also forced to substantially reverse a set of policies that are known in France as the "tournant de la rigueur" (austerity turn) to fight inflation and regain competitiveness. Along with new taxes, these measures included the devaluation of the French franc. Afterward, the Socialists lost the municipal elections in 1983 and the European Parliament elections in 1984. In the long run, the French economy saw a modest recovery, and Mitterrand was re-elected in 1988.

Hollande's announcements are not as broad and deep as Mitterrand's, but the current president is also operating within tighter limits. France's membership in the eurozone gives Paris considerably less room to maneuver because adjusting monetary policy is not an option and fiscal policy is applied under the increasing supervision of the European Union. With growth forecasts for the French economy below 1 percent in 2014, unemployment still on the rise and increasing political pressure from the far right, Hollande will still be dealing with an adverse social, political and economic environment this year.

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