14 January 2014

Hollande calls for "responsibility pact"

As reported by the Financial Times (subscription required), François Hollande launched a bid to revitalise Europe’s second-largest economy and rescue his faltering presidency by promising a landmark €30 billion payroll tax cut for French companies. The president, under pressure to take bold steps to boost a weak recovery that is lagging behind much of the eurozone, said he would also seek to reduce corporate tax and tackle France’s notorious red tape and onerous labour regulations.

Eurozone policy-makers have become increasingly concerned about France’s lacklustre economy, precarious public finances and reluctance to adopt the same kind of reforms to boost competitiveness as other debt-laden countries in the bloc. "It is imperative that France restores the power of its economy. There is no time to lose. France must rebound to retain its influence in the world and in Europe", Mr Hollande said.

The president pledged cuts in public spending, but did not go further than previous government commitments to €15 billion in savings this year, followed by €50 billion over the following three years. Mr Hollande’s promise of a €30 billion cut in social charges would shave some 5.4 per cent off average total wage bills for employers. To date, the government has implemented a €20 billion tax break for companies in a bid to restore competitiveness.

He called his proposals a "responsibility pact" that he said would require business to commit to increase employment in return for the cuts in labour costs, tax and red tape. He said a body would be established to monitor job creation under the pact.

The Independent elaborated that abuses and excesses in the welfare state would be attacked. In return, employers must commit to creating tens of thousands of new jobs. There would be a drive to cut the sprawling French state apparatus, examining all policies anew and saving an extra €50 billion. Entire areas of local government could be merged or abolished.

Mr Hollande played the tight-rope walker. He said that these proposals were not a "U-turn" or a new departure, just an "acceleration" or "deepening" of what he has done in the last 20 months. He said that his proposed "responsibility pact" was the "most radical social compromise demanded of the French people for many decades".

The New York Times reported that French commentators welcomed what they called a change in tone on fiscal matters, describing him as more decisive, leaderlike and clear.

The Guardian quoted Hollande's vision for France's future: "Where will be be in 10 years. Will we be a big country that takes its place in the world, that has it's place and takes decision. Or will we be a country that looks at others, that complains and runs itself down...that doesn't have confidence. Non, non, France must understand she has a great destiny if she is prepared for it", he said.

Responses/comments

Hollande’s speech received a lukewarm welcome from French business leaders who called it a "step in the right direction", but questioned the specific structural reforms which will take place, writes Reuters. His allies hailed a new "social democrat" vision for France but unions said they were worried about job cuts to the army of state sector workers and far-left politicians accused him of a sell-out as he moved towards the political centre.

The Wall Street Journal (subscription required) reported that Hollande won support from European allies for his proposal to cut public spending to fund corporate tax cuts, even as businesses at home were cautious. "What the French president revealed yesterday is courageous", said German Foreign Minister Frank-Walter Steinmeier in a statement.

The European Commission also welcomed the focus on spending cuts rather than taxation. "The measures being considered should strengthen the competitiveness of French business and have a beneficial impact on growth and employment in the country", spokesman Olivier Bailly said at a briefing in Brussels.

In a press release on 17 January, OECD Secretary-General Angel Gurría said: “The measures announced by President François Hollande at his press conference on 14 January 2013 are highly encouraging, both in terms of the determination shown and the substance of planned reforms. These measures are globally in line with the OECD’s recommendations, while the recognition of a general weakness on the supply side concurs with the conclusions drawn by the OECD.

"The willingness to reduce employers’ social contributions, which are the highest in the OECD area as a percentage of GDP, through an essential reduction in government spending, is particularly welcome. However, the planned reduction in social contributions must go beyond the abolition of contributions to family-related benefits alone. This would make it possible to boost employment, restore business margins, finance investment and ultimately improve competitiveness. The creation of a Strategic Council to oversee cuts in public spending is also important, as it can help inform public debate and lend strong support to reforms.

"Finally, the willingness to streamline France’s territorial organisation, which at present is far too fragmented, is a key component of budgetary consolidation and the drive to improve public sector efficiency. The clarification of areas of responsibility and the merging of local government bodies must include not only the regions and départements, but also the communes. Reducing State funding for local government entities which resist mergers would be a good incentive. Implementing these plans, which will require a strong political commitment, will surely improve the performance of the French economy.” [Full press release]

Fitch Ratings says that President Hollande's announcement of new labour tax cuts and his public commitment to press ahead with structural economic reforms is potentially supportive of competitiveness and medium-term growth in France, although assessing their likely impact will require further clarity on details and implementation. Furthermore, it is not yet clear how the proposed tax cuts would fit within current fiscal plans. [Full press release]

Hollande's full address (in French)

Political analysis by Le Monde (in French)