France Under Hollande: Europe’s Next Big Headache

French President Francois Hollande must learn taxes alone can’t solve the problems of Europe's second-largest economy

  • Share
  • Read Later
Eric Herchaft / Reporters / Redux

French President Francois Hollande

When the Socialist Party’s Francois Hollande claimed the French presidency in 2012, he brought new hope for a fresh approach for a European economy burdened by debt and recession. Europe’s biting austerity policies to quell the euro zone’s sovereign debt crisis had to be replaced, he asserted, by a pro-growth strategy to rescue millions from joblessness and despair. He pledged to preserve the country’s vaunted welfare state and protect its middle class by making those with ample cash pay their fair share. It was a heady mix of ideas that carried him into office over incumbent Nicolas Sarkozy.

Today, 18 hard months later, Hollande’s situation has very much reversed. The French people have risen up against his policies, the economy remains in a deep malaise, and Hollande himself has suffered a startling fall from grace. His approval rating slumped in November to a remarkable 15%. The Financial Times, in a recent editorial, derided him as “hapless” and asserted that “his presidency is proving to be the most lackluster in the history of the fifth republic.”

(MOREEurope is the Best at Producing, Attracting and Retaining Talent)

Hollande’s fate matters to Europe and the world at large. France is the world’s fifth-largest economy (and the second-largest in Europe, after Germany), so what happens in the country impacts growth for the region overall. And though the European economy isn’t as bad off as it was a year ago – the euro zone is finally climbing out of its unbearably long recession; the market turmoil that threatened to break apart the monetary union has been quieted – it still needs all the help it can get. The IMF expects euro zone GDP to contract again in 2013, by 0.4%. Unemployment in the zone stands at a sickening 12.1%. It is critical for all of Europe for France to get its act together and its economy moving.

That, however, is not happening. The IMF forecasts that French GDP will advance a mere 0.2% in 2013, after zero growth last year. Hollande has failed in his pledge to bring down French joblessness. Unemployment remains a lofty 10.9%. And Standard & Poor’s dished out another embarrassing downgrade of France’s sovereign credit rating last month. “The downgrade reflects our view that the French government’s current approach to budgetary and structural reforms,” the agency explained in its report, “is unlikely to substantially raise France’s medium-term growth prospects.”

(VIEWPOINTIreland’s Bailout Exit–Why it’s Too Early to Celebrate)

That approach has been slow and lopsided. Hollande has made minimal progress on reforming the French economy in ways that could bolster growth. The OECD warned in November that France needs to enact a laundry list of reforms in order to improve its competitiveness – loosening up labor protection, deregulating markets, enhancing bureaucratic efficiency, and strengthening the education system. Nor are economists enamored with Hollande’s tactics in reining in the state. To be fair, he has made progress in reducing the budget deficit, and France’s fiscal position is nowhere near as bad as some of its neighbors. Yet Hollande has stabilized government finances primarily by raising taxes, while actual reductions in spending have been minimal. Though Hollande has promised budget cuts, some analysts believe they don’t go far enough and wonder how committed he is to such a politically sensitive program, especially amid a weak economy. “France needs to cut public spending,” economists at Societe Generale asserted in a recent report. “Time will tell whether the government has the willingness and the capability to do that.”

(MOREUkraine’s Protesters Are Inspired by European Ideals, However Illusory)

The pressure for him to start slicing, though, has been increasing rapidly. The French public is effectively taxed out. OECD statistics show that total tax revenue was 44% of GDP in 2011, compared to only 25% in the U.S. Outraged at Hollande’s persistent tax increases, they’ve initiated a near-uprising against his policies. France’s professional football players had threatened to strike over Hollande’s undying efforts to increase the tax rate on the country’s biggest earners to 75%. Farmers have been angrily protesting against a levy, called an “Ecotax,” on the heavy trucks that carry their produce to market. Even though Hollande suspended the tax in late October, the protests have continued anyway, over high taxes and job losses generally. Donning red caps in emulation of a 17th-century anti-tax movement, the protesters have taken on a symbolic quality – resistance to Hollande’s methods overall.

That’s not necessarily fair to Hollande. Voters ushered him into office because his predecessor, Sarkozy, was perceived as too cozy with the wealthy and too quick to impose hated austerity measures, and they cheered Hollande when he rolled back some Sarkozy reforms. But now they are rejecting Hollande’s alternative strategy – tax hikes – as well. This is unrealistic. The French people cannot maintain all of their grandiose social programs and then refuse to pay for them. Any politician would be hopelessly stuck, then, between the unreasonable demands of voters and the greater economic needs of the nation.

Yet Hollande will somehow have to find a way through. Without further reform, the possibility remains that France could end up like its debt-laden neighbors – punished by markets with rising borrowing costs that could drag France into crisis. “If France fails to heed these calls for reform, market doubts about the country’s solvency may also start to intensify,” warned James Howat, economist at Capital Economics. That’s something Europe, and everyone else, can ill afford.

MOREIs U.K.’s Cameron Right to Worry About ‘Welfare Tourism’ in the E.U.?

3 comments
richard.draucker
richard.draucker

Whether it's France or the U.S. the problem is the same.  People don't make enough money for the work they do and there isn't enough work to provide for them.  The solution isn't to raise taxes or cut spending.  The solution is to invest in the people themselves.  These developed nations need to embrace self employment, not corporate employment as they have in the past.  They need to make it easy to start a business, and just as easy to recover after failure.  There should be programs to assist small business owners with decision making and programs to provide financing for those who need more than the capital they can raise on their own.  


NaveedXVO
NaveedXVO

Why does he care. Just take the money from the money grubbing rich and give it to the jobless. The only reason the people don't have jobs is because the rich are so greedy. I thought he was a socialist?

aztecian
aztecian

@NaveedXVO yes, he needs confiscate the money the rich pilfered from the people.  it time he rise up and do what is right.   this b.s. leaving things to go this low.  he was brought into power to take back.