23 January 2014

Reuters: Hardest yet to come for France's Hollande on reforms

A week after his January 14 announcement, it is not clear how and when he will pull off the public spending and tax cuts at the heart of the plan. It is also uncertain whether French business will play ball with his goal of cutting unemployment. Moreover, the new determination to cut taxes opens a whole new Pandora's box: the question of whether Paris will bring its public deficit into line with EU targets next year as promised.

Hollande's change of tack last week came after it became clear his policies thus far were not working: major investment in state-subsidised jobs was not bringing down unemployment, and the public deficit was not falling as quickly as planned despite a string of tax hikes. In a major shift of emphasis to the supply side, Hollande acknowledged the route to recovery lay in restoring French corporate margins that are the lowest in the eurozone by handing them €30 billion of tax breaks by 2017.

Alongside was an announcement that existing plans to trim public spending set to hit 57 per cent of national output this year would be accelerated with cuts set to total over 50 billion euros between 2015 and 2017.

Since then, his aides have raced to fill in the gaps. The bulk of the tax breaks are to come from the conversion of tax credits already announced, while the rest will be financed out of €5-10 billion in new savings from cutting expenditure. Taxes could start falling as early as next year. "We won't be able to do much then, but we have got to get the momentum going", said one Hollande aide.

But if France decides on tax cuts as early as next year, that raises the question of whether it will still be able to bring its deficit down from 4.1 per cent of output last year to under the three per cent threshold it promised for 2015, and then go on to achieve a structural balance in 2017. Finance Minister Pierre Moscovici told parliament on Wednesday the 2015 target would be met.

Hollande's so-called "responsibility pact" is drawing comparisons with the reform drive a decade ago by German Social Democrat ex-Chancellor Gerhard Schroeder that is credited with turning round the eurozone's biggest economy. In Schroeder's case, the "alliance for jobs" of his first mandate may have achieved patchy results. But it is now seen as setting the stage for the more aggressive labour market reforms of his second mandate under the "Agenda 2010" banner.

Hollande, already battling with record low ratings for a modern-day French president, may not have the luxury of a second term. He also has to deal with French industrial relations that are historically testier than in Germany.

Full article

In an interview with The Wall Street Journal, French Finance Minister Pierre Moscovici said the programme of spending cuts and tax changes announced by President François Hollande this month was consistent with earlier economic changes introduced in the president's 20-month administration but was needed to further encourage investment, spur growth and generate employment. "It's not a U-turn, it's not a change in our policy, but it's clearly a game-changer…France is not an unreformable country; it has to be reformed and it can be reformed", he said.

Mr Moscovici said the government needed to show it could follow through on the announcements. "The problem is now action; the problem is implementation." He said details of the programme of spending cuts, simplified business taxation and lower payroll taxation would be decided by the end of March, when it would be presented as part of the 2015 budget. If these steps were successful, the government might have the leeway to introduce "more intelligent taxation for individuals", he said.

Further reporting © WSJ (subscription)

In a report published on 27th January 2014 the Council of Europe's Group of States against Corruption (GRECO) welcomed the various recent reforms to prevent corruption in France but noted that there are still major gaps in regulations and the status of MPs, judges and prosecutors. GRECO concludes that MPs and Senators are still not subject to adequate rules concerning conflict of interest, gifts, and other advantages.

Full report

Writing in Les Echos (in French), Guillaume de Calignon compares François Hollande’s announcement of the responsibility pact with Jacques Delor’s announcement of austerity and supply-side policies in 1983. Then, the appeal was to increase France’ competitiveness and make sure the country stays inside the European Exchange Mechanism. The message was sold to the French on a dream to form an ever so closer European Union.

Today, no great project inspires to justify this change of course. Calignon even warns that such a supply side policy can only work if demand is not faltering. When Germany implemented its own kind of responsibility pact, the Agenda 2010, it benefited from a favourable export conditions in the EU. Germany’s fiscal deficit was also allowed to exceed the 3 per cent limit in 2003-2005. This is the privilege France does not have today, amid weak demand throughout Europe and a disinflationary trend. And it certainly cannot allow a slippage in the budget as Germany did then. Calignon concludes that Hollande’s responsibility pact thus can only be a first step before launching a new European cooperation project.

EuroIntelligence blog

Meanwhile the Frankfurter Allgemeine Zeitung (in German) and Reuters (in French) report that Latvia's Finance Minister Andris Vilks has said in an interview that stability and sustainability of the currency union were of utmost importance to him, calling on France to take effective action against its economic weakness. "French President François Hollande has said repeatedly that he has a plan to revive the French economy - but in fact nothing has happened", Vilks told Reuters.

He emphasised this especially as France is the second largest economy in the eurozone and thus an extremely weighty member of the currency union. "And if such a large country lagged somewhat behind other core countries, that may pose challenges for the entire eurozone", he said. While there was such a thing as natural resistance to reform, he warned that "for those countries that have not yet started the reform process, it will only become more painful".

© Reuters