Hollande Replaces Cabinet as EU Austerity Rebellion Stirs

French President Francois Hollande’s firing of malcontent minister Arnaud Montebourg risks unleashing the ruling Socialist Party’s chief critic of budget cuts, adding to an austerity backlash stirring across Europe.

Montebourg, 51, industry minister for the past two years, will not be part of the new team Hollande names today after he publicly criticized the president for “slavish” and “dogmatic” deficit reduction that he said stokes unemployment.

The dismissal of a top minister underlines the political crisis confronting Hollande as he seeks to balance European Union pressure to reduce the deficit with domestic demands to revive a stalled economy. It also exposes a wider rift in Europe as Italy uses its six-month presidency of the 28-nation EU to make a stand against a German-led drive to clamp down on spending.

“The backlash against austerity has taken some time to arrive, but this is it,” Antonio Barroso, an analyst at Teneo Intelligence in London, said by phone. “Of course Montebourg has done this for his personal ambition, but his timing is good: The mood on this is shifting at the European level.”

France’s CAC 40 Index was little changed today after adding 2.1 percent yesterday. The yield on the 10-year government bond fell 2 basis points to 1.29 percent, close to a record low.

French Joblessness

With an approval rating of just 17 percent and faced with record-high French unemployment levels, Hollande’s room for maneuver is shrinking as he slips into the second half of his five-year mandate.

His purge of Montebourg from the cabinet merely moves the chief austerity critic from his side into the open, according to Arthur Goldhammer, co-chairman of the French Study Group at Harvard University’s Center for European Studies.

“The breach in the Socialist Party is now an open bleeding wound,” Goldhammer said in a blog posting. “Hollande can push out Montebourg but not the problem he represents.”

Montebourg’s rebellion has a ready audience in his party after Hollande pledged 50 billion euros ($66 billion) in spending cuts over the coming three years, with the savings being used to fund a reduction in payroll taxes for business. In a weekend interview with Le Monde, Montebourg said a third of the money should be used for household tax cuts to lift domestic demand.

‘Dismal Failure’

Montebourg’s critique was also aimed at Germany, which has led the charge within the EU for fiscal responsibility along with structural reform as a prerequisite for economic recovery. That response was slammed last week by Nobel laureate Joseph Stiglitz, who said that euro-area austerity policies have been a “dismal failure” as evidenced by stalling economic growth.

“The politics of austerity, of higher taxes, decided by governments, have lengthened the economic crisis,” Montebourg said at a news briefing in Paris yesterday. “These errors have raised questions in many European countries,” and “not only are the policies not working, they are unjust.”

That contradicted the message from German Chancellor Angela Merkel, who told reporters in Spain that she wished Hollande, 60, “every kind of success with his reform agenda,” saying the measures he had proposed were “bold.”

Italian Prime Minister Matteo Renzi, 39, emboldened by the strongest showing of any national leader in European Parliament elections in May, is trying to cajole Europe away from austerity and toward more fiscal flexibility by easing the clamp on spending that was applied during the debt crisis.

Common Cause

In doing so, he has found common cause in France as well as among opposition groups in Greece and Spain. Even in Germany, Merkel’s Social Democratic coalition partner called for Italy and France to be granted more time to cut deficits.

In France, the government tore up its budget-deficit targets this month after the economy, the euro-area’s second biggest after Germany, posted no growth in the past two quarters. Jobless claims rose to a record in July.

Montebourg, who intervened earlier this year in Vivendi SA’s efforts to sell its SFR unit and in General Electric’s $17 billion purchase of Alstom SA’s energy business, turned his sights on the European Central Bank last month, calling on it to buy bonds and weaken the euro to boost growth.

“My responsibility is to propose alternative solutions” to austerity, Montebourg said yesterday, calling on others to find “the intellectual and political courage to say it.”

“Yes, another way is possible,” he said. “For France and for Europe.”

That’s an appeal that resonates with elements of his party as they consider a potential meltdown at the next presidential election in 2017. Montebourg, who campaigned in the Socialist primaries of 2011, placing third, pledged then to run again after his defeat by Hollande.

“If the economic data doesn’t improve, Hollande has nothing to sell,” said Barroso of Teneo Intelligence. “That leaves space for Montebourg.”

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