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Hollande's Mitterrand Moment

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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It turns out that French President Francois Hollande shares with his predecessor from the 1980s and '90s a lot more than a first name, the leadership of the Socialist Party and media interest in his private relationships. In a move reminiscent of Francois Mitterrand in 1983 -- also some two years into his presidential term -- Hollande unambiguously signaled this week an economic shift to the center and away from policies advocated by the left wing of his party.

The success of this pivot to break France out of stagnant growth and high unemployment speaks to much more than Hollande’s future, including his chances for winning a second term (as Mitterrand did in 1988) and the unity of the Socialist Party. It will influence whether the French end up opting for the extreme-right wing National Front candidate (Marine Le Pen) at the next presidential election in 2017. As such, it also has implications for the sustainability of Europe’s single currency.

Confronting subpar economic performance and high unemployment, Hollande faced growing public dissent from outspoken Cabinet ministers from the left wing of his party. Inpurging these internal opponents, he has crafted a decidedly more centrist Cabinet. Importantly,he gave the economic portfolio to Emmanuel Macron, a young former Rothschild Bank executive who previously served as a presidential adviser and is viewed as being close to the business community.

These moves are reminiscent of what Mitterrand did a little more than 30 years ago. Having first given Cabinet posts to members of the Communist Party and pursuing decidedly left-wing policies -- including nationalizations, hikes in the minimum wage and a tax on wealth -- Mitterrand shifted to a more centrist economic policy approach in the midst of popular dissatisfaction with economic growth and joblessness. This change included a 1983 “tournant de la rigeur” that saw Mitterrand opt for austerity measures that largely remained with him for the rest of his two-term presidency.

Mainstream history has treated that U-turn favorably. It is seen as having helped France improve economic performance, enable political cooperation and advance Europe’s historic regional integration project. Although Hollande is undoubtedly interested in a similar outcome, his prospects are more challenging.

While Mitterrand’s popularity was low in 1983, his approval ratings never conveyed the same degree of weakness that Hollande is enduring now. The economy’s structural impairment and debt overhangs weren't as bad as what France faces today. Mitterrand’s economic policy flexibility was considerably greater than Hollande’s, given that France wasn't yet part of a monetary union anchored both economically and financially by Germany. And there are limited prospects that France will be pulled up by the type of global economic recovery that helped Mitterrand back then.

All this is to say that, even if Hollande’s centrist shift is warranted by economic necessity -- a hotly debated hypothesis in itself -- its success faces much greater uncertainties. Moreover, if it falters, the consequences would be material, aggravating divisions within the French political left, adding to parliamentary dysfunction and increasing the chances of a one-term presidency for Hollande.

With the moderate right wing of the French establishment struggling to come together under a credible leadership, it would open the door for the National Front to make a very serious run for the presidency, taking advantage of considerable economic and political dissatisfaction. Given Le Pen’s outspoken opposition to the euro zone, such a prospect in the monetary union's second largest economy would quickly destabilize regional economic and market sentiment.

Corrects spelling of former French president Francois Mitterrand's last name in article published yesterday.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at melerian@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net