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France’s Hollande Lays Dodo Bird Egg With First Budget

By the Editors 2012-07-29T22:30:14Z

On Wednesday, France will become the first European country to impose a tax on financial transactions. This was a bad idea in the past; it’s a worse one now.

As the most significant fiscal measure to be enacted thus far by the Socialist government of President Francois Hollande, it’s also a disturbing sign.

The 0.2 percent tax, loosely modeled on the ideas of the U.S. economist James Tobin, will be applied to the purchase of shares in 109 French companies with market capitalizations of more than 1 billion euros ($1.2 billion). A similar levy will be imposed on high-frequency trading and so-called naked sovereign credit-default swaps.

A Bloomberg News report recently showed that the tax is larded with loopholes, and the expected revenue is negligible: 170 million euros in 2012 and 500 million euros next year. At worst, it will frighten away investment and curb needed growth; at best, it is a distraction from the heavy lifting that Europe’s second-largest economy must do to revive.

The measures are part of an amended 2012 budget that also includes a special tax on wealth, increased levies on company dividends, and rollbacks of reforms of France’s unsustainable social-welfare system and labor laws by the previous administration.

Spending Cuts

Notably absent are any meaningful spending cuts. Hollande has repeatedly vowed to find 50 billion euros in savings to reduce the deficit to 3 percent of gross domestic product next year from 5.2 percent last year. With the French public sector already accounting for about 54 percent of gross domestic product, taxing the rich and showing “big finance” who’s boss are no substitute for painful, but necessary, fiscal choices.

Hollande knows this to be true: Last week, the Observatoire Francais des Conjonctures Economiques, a research organization with ties to the Socialist Party, said the government was unlikely to fulfill its promise to simultaneously lower unemployment and bring the budget into balance by 2017.

France’s competitiveness can only be restored through more of the kind of unpopular structural change that the last president, Nicolas Sarkozy, had begun and that Hollande is now reversing. These include lengthening the 35-hour work week, raising the retirement age, making it easier to hire and fire employees and cutting back on some entitlements.

Since taking office in May, Hollande has offered a salutary counterweight to German Chancellor Angela Merkel and her push for all-austerity as the remedy to the debt crisis gripping Europe. He was right to say that belt-tightening must be accompanied by measures to promote growth. Unfortunately, by putting forward a budget that contains neither, he is fulfilling Merkel’s worst fears and failing to set the right example for the rest of Europe.

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Today’s highlights: the editors on how to improve the farm bill; William D. Cohan on Wall Street’s arbitration system; Noah Feldman on the NCAA’s unconvincing sanctions; Albert R. Hunt on rating U.S. presidents; Luigi Zingales on a European banking union; Raymond Bonner on the FDA’s immoral policy on lethal- injection drugs.

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