France charts a wanderingcourse

The Hollande government weathers a stormy economy without a compass.

“The only people who have to keep their promises are those who believe in them,” Jacques Chirac was known to say. His successor, François Hollande, has backed down from his administration’s commitment to shrink the deficit to 3% of the GDP, announcing that the target may be reached by 2017.

According to the European Commission, France’s budget deficit will amount to 4.4% in 2014 and 4.5% the following year. And at 4.7%, France is expected to have the highest deficit in the eurozone in 2016.

Finance Minister Michel Sapin has reaffirmed that the government has no intention of cutting public spending beyond the €50 billion it has pledged to cut by 2017. Hollande has thus spelled out French economic policy over the next few years: savings on public expenditure and farreaching reforms, oui, but getting under the EU’s draconian 3%, non.

With unemployment standing at nearly 10%, affecting roughly 3.5 million people, the government is committed to austerity, but in stages, so that domestic demand won’t dwindle down to nothing. In the third quarter of 2014, the French economy grew by just 0.3%. Unlike other European countries such as Spain, Portugal and Italy, France will very likely get the green light from the EC to bend the rules, subject to a number of conditions, of course.

France gets special treatment because of its economic heft (it is the second largest economy in the eurozone) and for political reasons. After all, the European Union was built around the Paris-Berlin axis, and a break would be unthinkable for Germany: it would mean the end of the EU. Despite growing concerns over France’s chronic deficit, compromise is inevitable. The markets seem to have received the message as well, to the point of considering France to be under Germany’s tutelage. Despite a disappointing economic performance and the fact that for most of the past 40 years France has never come up with a balanced budget – and its debt-to- GDP ratio is nearing 100% – the interest rates on the French national debt are still low, at least for now: roughly 1.4% for ten-year bonds.

France, in short, is trying to buy some time so it can launch reforms that will bolster its business competitiveness – the Hollande administration has approved a plan to lower taxes on businesses by €40 billion – without dampening domestic demand and thus plunging the country into a deep depression, with serious social and political consequences.

At the last European elections, Marine le Pen’s National Front became the leading party in France, while Hollande’s approval ratings are the lowest ever recorded by a French president, and certain members of his parliamentary majority are increasingly critical of his ‘favours’ to companies and austerity policies in general. Further cuts to public spending risk fomenting social unrest and destabilizing the political situation just two years before the next presidential elections. In reality, Hollande is already carrying out significant reforms – of the labour market, territorial reforms, cuts in public spending, lower taxes on businesses, a renewed social dialogue and so forth – but they are all long overdue. Having marketed himself as a ‘Mr. Normal’ president, François Hollande finds himself facing abnormal, if not utterly exceptional, circumstances.

Twenty years ago, Hollande’s reforms as outlined above, which now aim to boost supply without hurting demand, would have allowed France to reach maturity as a European ‘social democracy’ , perfectly able to face the challenges of globalisation. Yes, François Hollande would have been an excellent socialist president of the French Republic… in the 1990s.

Now, however, the measures seem inadequate, the response faint-hearted. Elected in 2012 on the strength of the left’s traditional promises (which boil down to relaunching the economy through greater public spending), Hollande has wasted over a year hammering out a policy better suited to the times.

By changing his policies midstream and shifting to a line of reinforcing business competitiveness and supply-side policies, he has only succeeded in confusing the French with his programme, especially those on the left. Statements made by the new prime minister, Manuel (“I love business”) Valls, and the positions embraced by the young economy minister, Emmanuel Macron (who favours increasing liberalisation and challenges France’s 35-hourworkweek), have been seen as a betrayal of the Socialist Party’s ideals from within.

Above and beyond the changes now underway, Hollande’s wavering course gives the impression of someone playing it by ear rather than implementing a coherent strategy. France is making gradual reforms, and each year Brussels cuts it a little slack on its budget, but the real economic and political issues are never faced head on. Traumatised by the 2005 referendum in France that rejected the treaty establishing a European constitution, which knocked him out of the 2007 French presidential race, François Hollande, like almost all the French leaders, is not eager to open that can of worms again.

Locked into the illusion of defending national sovereignty (a losing battle if ever there was one), all Hollande can do is bend the budget rules a little and engage in some small-scale tinkering.