During his 27 months in office, French President François Hollande has consistently disappointed his countrymen with predictions of economic recovery that haven’t materialized. Now the beleaguered Hollande is trying to quell a revolt within his own Socialist Party.
On Aug. 26, he named a new cabinet, ousting ministers from the party’s left wing who attacked his plans to curb government spending and ease taxes on business. In an interview with Le Monde on Aug. 23, Economy Minister Arnaud Montebourg said it was “absurd” for Hollande to propose spending cuts when the economy has barely grown in three years and unemployment exceeds 10 percent. Three days later, Montebourg was out of a job, replaced by a 36-year-old supply-side reformer named Emmanuel Macron.
For Hollande, the shake-up increases the risk that the Socialist majority in Parliament will balk at approving his economic plan. “Implementation of any further reform is actually going to be more difficult,” with as many as 100 of roughly 270 Socialist lawmakers leaning toward Montebourg’s views, says Gilles Moec, chief European economist at Deutsche Bank in London. Such infighting could further dent business and consumer confidence, inflicting even more economic harm. Underscoring that risk, data released on Aug. 27 showed manufacturers’ sentiment at a 13-month low.
Montebourg, who’s eyeing a presidential run in 2017, is likely to keep up his attacks on Hollande. The sagging economy, along with revelations this year that the president was cheating on his longtime partner with a much-younger actress, have sent his popularity plunging to a record-low 17 percent, according to a late-August poll by the Ipsos survey group. The anti-austerity message is likely to resonate across Europe, where growth has stalled after painful belt-tightening. Even European Central Bank President Mario Draghi, who’s helped enforce euro zone budget discipline, called for a “more growth-friendly composition of fiscal policies” in the region, in a speech on Aug. 22.
France hasn’t demanded much fiscal sacrifice from its citizens so far. It has repeatedly failed to meet budget deficit targets agreed upon by European leaders. In France, government spending equals 56 percent of gross domestic product, the highest proportion of any euro zone country—a figure that hasn’t budged since Hollande took office in 2012. In neighboring Spain, which enacted draconian budget cuts and probusiness reforms, government spending has fallen from almost 47 percent of GDP, to 43 percent, since 2012.
Soon after taking office, Hollande started raising tens of billions in new taxes, mainly on businesses and high-income households. Social benefits and other government spending were left largely untouched, along with rigid labor rules that crimp French companies’ competitiveness. The government “tried to postpone the day of reckoning, hoping that there would be a European recovery” that would lift the economy enough to avoid difficult reforms, says Bruno Cavalier, chief economist at Oddo Securities in Paris. Instead, France Inc. slashed investment and hiring, forestalling a rebound.
Earlier this year, Hollande made a policy U-turn. He named a new market-oriented prime minister, Manuel Valls, and promised some €50 billion ($66 billion) in budget savings over the next three years to help offset lower payroll taxes on business. The plan is “exactly what Mr. Draghi would call growth-friendly,” Cavalier says.
Hollande and Valls have some tools at their disposal to win Parliament’s approval. Under the French constitution, some legislation can be enacted without a parliamentary vote, a tactic frequently employed by Socialist President François Mitterrand. Hollande could even threaten to dissolve Parliament, a move that would trigger new elections in which many Socialists would risk losing their seats.
Some ordinary French citizens seem ready to give Hollande and Valls’s plan a chance. “We have to be frank,” says Jean-François Moes, a sales manager in a real estate finance firm who was lunching on a baguette sandwich outside the Printemps department store in central Paris. “We need to tighten our belts and stop living beyond our means. We have to free up companies and release the constraints to hire and fire.”