Hollande Continues in Survival Mode

January 18th, 2014
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France's socialist president, Francois Hollande, threw down the gauntlet to his many critics to the left of his own party and more especially in the "left of the left" parties the the National Assembly, the key chamber of the French parliament at a press onference on January 14.

He used the press conference to say in very clear terms that France will not prosper unless the business sector is able to produce more and increase employment.

Follow up:

To that end the rolled out a programme, including a "Responsibility Pact" between the government and business, by which the government will cut payroll taxes (social insurance charges) and lower and simplify taxes on business. In return or this, usiness will be expected to step up investment and employment.

In addition, the government is pledged to cut public spending, currently about 56% of GDP, by €50bn over the three years 2015-2017, while also making an effort to economise by making the public sector, and especially the health care system, more efficient.

His programme was denounced by Jean-Luc Melenchon, self-styled leader of the left of the left, who won 11% in the first round of the 2012 presidential election, as "the greatest betrayal by a left- wing government" in the history of the Fifth Republic, an opinion which the leaders of some of the biggest trade unions also share.

In the ruling Socialist Party itself there are also quite a number who are not happy with the turn events have taken. itself who are critical. As the party's absolute majority in the National Assembly is wafer thin, this could become a problem.

However, the French media seem to be convinced that the president will carry the day, reporting that the president himself is confident that there is not much risk that the government of Prime Minister Jean-Marc Ayrault will run into serious trouble.

Meanwhile, the president received strong backing from the governor of the Bank of France on January 16, who said in an interview with a French radio programme that the Responsibility Pact between the government and private enterprise is just what is needed to increase the international competitiveness, and the sooner decisions are taken to implement it, the better it will be. He said:

"The reduction labour costs will permit the creating of a million jobs in the next five years, of that I am sure."

The headline rate of unemployment totalled 3.29m at the last count Employment has stuck at around 26m since the financial crisis hit the world in 2008. If the French economy had grown at the normal pre-crisis rate, employment now would be around 28m, economists estimate.

However, the president's apparent determination to drop the Keynesian counter-cyclical demand-side policy dear to French governments for decades has surprised many people, although the truth is that Keynesian counter-cyclical policy is not an option for a nation that is a member of an monetary union, especially one that has a national debt just under 93% of GDP, a budget deficit of 4% of GDP and a current account deficit of 2%m of GDP.

But it shocked the well-known Irish economist, Kevin Rourke, who slammed the president for saying at the press conference that supply creates its own demand, one of the oldest fallacies in the economists' book, as Hollande, who taught economics at one of France's elite universities in his younger days, might agree if pressed..

On the other hand, the policy in the initial stages of the presidency of imposing substantial tax increases on business (as well as almost everyone else) has not done anything to help businesses to keep up the numbers on the payroll and has savaged investment.

He also hopes that lowering taxes on business will improve profitability and hence business investment. Profits, as measured in the national income statistics, are just under 28% of GDP, one of the lowest rates among Euro zone nations and far below Germany's ratio of about 41%.

Critics of the government's programme worry that the impact of austerity policy arising from spending cuts may be just as severe as the impact of heavier taxes has been in 2012 - 2013, with more to come this year.

The government has to hope that the stimulus arising from cuts in labour costs will enable the private sector to compensate for this effect.

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