Hollande Bids to Quash Cabinet Mutiny With Minister Moves

French President Francois Hollande and Prime Minister Manuel Valls replaced three ministers as they moved to end a cabinet revolt over spending cuts and limit the mutiny’s spread in their parliamentary group.

Hollande, who fired Arnaud Montebourg as economy and industry minister Aug. 25 after he slammed the government for its adherence to “absurd” austerity policies, named Emmanuel Macron, 36 and a former presidential adviser, as Montebourg’s successor. Michel Sapin was reappointed to finance.

“There was clearly a leadership issue” for Hollande after Montebourg’s public outburst, Karine Berger, a former economist at Euler Hermes SA and a Socialist lawmaker, told The Pulse on Bloomberg Television yesterday. “There is a debate in France over austerity and economic policies. Montebourg tried to open the debate, but the bosses are Hollande and Valls.”

Laurent Fabius remained at the Foreign Ministry and Jean-Yves Le Drian kept his post at defense, while Segolene Royal also retained control of the environment and energy portfolio.

“We must create wealth and we must cut our deficits,” Valls said last night in an interview on France 2 television. “France has been living beyond its means for 40 years.”

This year’s deficit is projected to exceed the limit of 4 percent of economic output agreed to with the European Union’s executive body.

Younger Ministers

Hollande had pledged to increase the number of younger ministers and to keep the gender balance, according to his office, which said the new government has to be respectful and united around the president.

Hollande’s fourth government in little more than two years underlines the challenge he faces trying to revive a stalled economy while under pressure from the EU to reduce the deficit. The rebellion that prompted the overhaul reflects a wider revolt in Europe over a German-led drive to balance budgets and carry out reforms as a prerequisite for growth.

“This government needs to give confidence and energy to France,” Stanislas de Bentzmann, president of the pro-growth business group Croissance Plus, said in a statement. Measures needed include lower social charges, easing of labor laws and the 35-hour workweek and more professional training, he said.

Montebourg, 51, who was Hollande’s minister for industry and economic recovery for the past two years, publicly criticized the president in a weekend interview over what he said was “slavish” and “dogmatic” deficit reduction that costs jobs. His critique mirrored that of a group of Socialist lawmakers who oppose the government’s economic measures.

Alstom Deal

Montebourg’s portfolio now falls to Macron, a former Rothschild & Cie. banker, who was Hollande’s economic adviser until July. He was in charge of drafting major reforms including taxes on labor and the so-called Responsibility Pact to cut state spending.

The president’s office said Macron also played a key role in French government efforts to get the best deal for Alstom SA’s energy business.

France’s CAC 40 Index closed up 1.2 percent yesterday after adding 2.1 percent Aug. 25 when Hollande’s office said Valls had been asked to appoint a new ministerial team. France’s 10-year bond yield fell as much as four basis points to a record-low 1.271 percent.

Purging ‘Malcontents’

Purging the malcontents brings clarification and flexes “executive authority,” even if the credit falls more to Valls than to the president, said Gilles Moec, chief European economist at Deutsche Bank AG. The political reality is that Hollande’s public popularity is diminishing and he’s lost the support of about 100 lawmakers and potential allies, he said.

“The message will be clearer but the execution of reforms will be much more difficult,” Moec said.

With an approval rating of just 17 percent in an Ipsos-Le Point poll released Aug. 25 -- the lowest for a French leader -- and record-high French unemployment levels, Hollande’s room for maneuver is shrinking as he slips into the second half of his five-year mandate.

The government tore up its budget-deficit targets this month after the economy posted no growth in the past two quarters. The Montebourg challenge and cabinet overhaul come a month before the government is due to unveil the 2015 budget, which Hollande may need opposition votes to pass in parliament.

Montebourg’s rebellion, which was joined by former Education Minister Benoit Hamon and former Culture Minister Aurelie Filippetti, has a ready audience in his party after Hollande pledged 50 billion euros ($66 billion) in spending cuts over the coming three years.

Hollande’s call for a new economic focus “won’t be answered because this fundamental problem has to be decided by the party and then endorsed by the president,” said Berger. Even so, “the reshuffle won’t close the debate,” she said.

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