French President Planning Showdown With Brussels?

April 3rd, 2013
in Op Ed, syndication

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Francois Hollande, whom opinion polls suggest is the most unpopular president in the history of France's Fifth Republic, launched an effort on March 28 to restore his credibility on in an hour long interview on prime time national television. He seems to have failed.

Some two-thirds of the eight million viewers did not find him convincing. Comments from critics on the left, who helped vote him into office, were just as scathing as those from the right-wing opposition parties.

Included in his remarks, Hollande said:

"I create growth. These are the tools which will deliver growth. I do not wait for growth, I create it."

Follow up:

Jean-Luc Melenchon, who won about 11 % of the vote in the first round of last year's presidential election on a radical left-wing platform, after listening to the president rattle off a catalogue of what had had done since he took office, declared:

"The Elysée (the presidential palace) is sinking."

But the fact is that these measures, including the establishment of a public investment bank, a subsidised job programme for several hundred thousand youngsters, and a much vaunted deal between the trade unions and the employers on labour market flexibility and job security, are swamped by the impact of the government's budget deficit reduction policy, which the euro zone member states are treaty-bound to follow.

This reduces domestic demand. GDP was unchanged in 2012 and is likely, at best, to be unchanged again this year. Consumer purchasing power fell last year when taxes were increased. In February consumption of goods, in volume terms, was down by 3 % on the same month last year and by 1 % in the December-January quarter, according to official statistics.

Unemployment at 3.187m and 10.2 % of the labour force in Metropolitan France (10.6 % in France with its overseas departments) is at its highest for 20 years and rising. In the first two months of this year it increased by about 62,000.

At this rate it could near 3.5m this year, although the president promises to "break the unemployment curve" by the end of this year.

"It is not a wish, but a battle, a commitment," he declared.

Options not available

What the president's left wing critics, many of them in his own Socialist Party, want is a complete reorientation of economic policy, "a shock to consumer purchasing power, a shock recovery programme" and measures " far more radical" than anything on the president's agenda, said a couple of them.

But these are options not available to the government now that France is a member of the single currency euro system.

The European Commission in Brussels cannot have been happy with what they heard either, or the German chancellor Angela Merkel.

President Hollande has a habit of not saying things too bluntly, leaving it to his listeners to torture the text to reveal the real meaning, but on this occasion is seems clear that he is bent on collision course with the European Commission and the Germans over the euro zone's self-defeating austerity policy.

"Prolonged austerity," he said, "will cause Europe to explode, making unpopular governments a mouthful when the time comes for the populist parties", such as the right wing National Front in France, Beppe Grillo's Five Star movement in Italy and others, as well as competing populist movements on the extreme left.

"I will not conduct a policy that condemns Europe to austerity," he said. He refuses to allow France's own fiscal policy to be described as austerity. That is term he reserves for countries like Greece and Spain where unemployment is over 25 %.

He will not respect debt trajectory

Professor Eli Cohen, one of France's top economists, said:

Francois Hollande will not pursue the policy of austerity recommended by the guardians of the 'camp of European recovery'. He does not intend to carry out the structural reforms prescribed by the OECD and the IMF....His objective is to support the level of activity and preserve employment. He will not therefore respect the deficit reduction trajectory in 2013 and 2014 (laid down by the European Commission).

France's budget deficit came down last year from 5.3 % in 2011 to 4.8 % of GDP, which was higher than the 4.5 - 4.6 % expected by the government, while the government debt to GDP ratio rose to 90.2 % against the 89.9 % predicted by the government, according to figures released on March 29.

President Hollande has already conceded that France will not, and will not try, to meet the 3.0 % deficit target for 2013 set by the European Commission, which has pencilled in 3.7 % for France's likely 2013 deficit and 3.9 % for 2014 (before allowing for policy changes) when France is supposed to cut the deficit to 2.5 %.

Slippage accepted

The commission has accepted slippage in 2012 and 2013, but on condition that France tables a programme of structural reforms and substantial reductions in public expenditure (at 56 % of GDP) to improve its competitiveness. This will be a matter for negotiations with Brussels, starting later this month.

Francois Hollande's reform agenda, and especially the time line, it is fairly safe to say, will fall well short of what the commission wants to hear, not only because he thinks this would be bad economics but also for political reasons.

Almost all the reforms that the commission, the IMF and the OECD think France should implement in short order, such raising the retirement age from 62, much more flexible labour markets, reducing the high minimum wage, cutting public expenditure, liberalising product markets and much more, are anathema to parties in the National Assembly who support present socialist government. This is not something that the president can simply choose to ignore.

French economist Charles Wyplosz, professor at the Geneva International Institute of Advanced Studies, writing here in French, argues that a debt as big as France has must be worked off gradually, over decades rather than years. He believes that this is hat Francois Hollande has in mind.

Doing nothing is right

Wyplosz says that at present the French government is doing nothing, neither raising taxes nor increasing expenditure, which is the best he can do in a situation in which he wishes to avoid the destructive impact of austerity.

Both he and Professor Cohen agree it is a policy that carries risks, however. First it will cause a collision with Brussels, the Germans, and, crucially, the European Central Bank, and the second is that France must be able to continue to finance its debt.

Wyplosz suggests that France's strategy should be to make credible commitments to cuts in public expenditure of the order of €150bn - 200bn, or about 15 to 20 % (the government is committed to a reduction of €60bn from 2012 to 2017, but has hardly got started yet) as well as commitments to structural reforms further down the road.

The object of this would be to convince the financial markets to keep buying France sovereign debt issue.

Destructive consequences

The president will argue that Europe has no interest in forcing France, the European Union's second largest economy, into severe austerity and its self-destructive consequences.

Neither have the financial markets, whose money is more likely to be safe under a gradualist debt reduction policy that makes way for some growth than if it becomes trapped by Spanish or Italian-style austerity.

Meanwhile, a more general fear voiced by French commentators is that with a rising budget deficit and a huge call for some €130bn this year to roll over existing government debt, combined with the lack of positive action on structural reforms, France may find interest rates on its government debt begin to soar later this year. That would set France on a trajectory uncomfortably close to that of Italy and Spain.

The high risk scenario is that political chaos in Italy or another Club Med country leads to threats of default. With French banks holding (as of summer last year) Italian government debt issue worth about 12 % of France's GDP, or around €240bn, and total claims on the peripheral euro zone countries at almost 20 % of GDP, or around €400bn.

The collateral damage would be serious, perhaps catastrophic, forcing the state to bail out France's banks, thus sending the government debt ratio to new heights.

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