France: Hollande struggles to balance growth and austerity

BORDEAUX, France — François Hollande was so unfazed by his soaking from a deluge of rain during his inauguration parade last May that even the previously critical Economist magazine called him “waterproof.” That was before lightning delayed the French president's much-anticipated initial meeting with German Chancellor Angela Merkel by striking his plane in the air. And that was only his first day on the job.

It's not going to get much easier.

France’s first Socialist leader since François Mitterrand left office in 1995 aims to guide his country through the euro crisis by balancing his election promise to restrain Europe’s austerity drive with the government's overriding goal of reviving the economy.

Although some analysts say the math is impossible, the French — who have so far praised his initial pragmatism and resoluteness — appear to be willing to give him the benefit of the doubt.

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Hollande will be helped by the very good fortune of a new Socialist government brought to power after the party's victory in June parliamentary elections gave it a historic concentration of power. It is busy drafting a raft of legislation for passing in the fall, including a plan for a 75 percent tax on income above $1.2 million.

The modest-seeming, affable new leader has tried to set a serious tone by styling himself as “Mr. Normal” to his predecessor Nicolas Sarkozy’s “bling-bling” presidency. But swapping Sarkozy’s flashy Peugeot limousine for a frugal Citroen hybrid was the easy part.

Relentless economic gloom, rising unemployment and mounting debt — already at 90 percent of GDP — have forced him to moderate his promise that “austerity will not be viewed as an inevitability” in Europe.

To wit, Hollande wants to slash more than $36 billion of his country's generous public spending by freezing civil service jobs and wages.

He and his fellow Socialist Prime Minister Jean-Marc Ayrault started by cutting their salaries and those of other ministers by 30 percent and reducing the official retirement age from 62 to 60 by raising corporate and employee taxes.

The policies are part of the president’s ambitious commitment to create 60,000 new teaching jobs, subsidize youth employment, reinvigorate the economy and bring French troops home from Afghanistan this year — all without increasing public-sector spending.

Some believe that’s unrealistic. “He made some absurd promises during the campaign, such as lowering the retirement age,” said Daniel Thomas of University College Dublin, “and he has felt obligated to fulfill some of them, which reduces his room for maneuver on other issues.”

Thomas believes Hollande has also hurt himself by failing to convey the complexity of the challenges facing France and Europe along with the sacrifices that will be necessary to plug a $50 billion black hole in public finances over the next 18 months.

Tough start

The first bad news for Hollande, a month into his presidency, came from Peugeot-Citroen. Announcing anticipated but massive losses on July 13, France’s largest carmaker said it would shut a large factory north of Paris and sack 8,000 staff.

Air France, telecommunications equipment firm Alcatel-Lucent and drug maker Sanofi followed by also announcing layoffs.

Although Hollande directed some of the blame at company directors and others he accused of pocketing too much profit, Peugeot's woes reflect wider structural problems in the economy.

Thanks partly to a large payroll tax, high labor costs make French industry less competitive. Manufacturers will require greater flexibility from labor to grow and provide more jobs.

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Hollande has proposed some bold economic action, including reducing the social tax burden on employers and repealing Sarkozy’s value added tax increase to encourage domestic consumption. But those remedies will also add to the national debt.

At the same time, some believe the government’s planned tax hikes will prompt the wealthy to park their businesses elsewhere. Britain’s Conservative Prime Minister David Cameron has already ruffled feathers by offering a “five-star welcome” for moneyed French. Business leaders are also raising the old warning that new taxes would precipitate a senior management brain drain.

“He’s trying to thread a needle here, to walk between two extremes,” said Harvard University’s Arthur Goldhammer.

That path is already proving precarious. One poll taken a week after the Peugeot announcement showed the president’s approval rating fell 5 points on the heels of a 2 percent drop the previous month. Previous leaders have traditionally enjoyed longer honeymoons.

Dimming Socialist hopes

Although Hollande’s pro-growth agenda raised hopes on the left across Europe, he has failed to extract major compromises from Germany, which is leading the call for austerity.

Merkel agreed to some economic stimulus in return for greater fiscal integration, and European Central Bank President Mario Draghi has promised to do more to buy struggling countries’ debt to preserve the euro zone. Although that enables Hollande to claim some success, demands for strict austerity in Europe’s indebted countries have so far prevailed.

Although Hollande was a key supporter of a new $150 billion EU growth pact, he also joined Germany to limit by more than half a proposed increase in payments to the EU for stimulating struggling economies in 2013.

Some critics on the left fear Hollande will succeed only in maintaining the status quo. “In France we have a Socialist Party that does not advocate socialism,” wrote economist Nyegosh Dube in the Social Europe Journal.

But others believe expectations Hollande would change the vector of European politics are unrealistic.

“While Hollande could negotiate with Merkel, he could not simply impose his terms on the EU,” says the University College Dublin’s Thomas, who believes the French are “unprepared emotionally” to meet the economic challenges facing their country.

Style and substance

Despite his obstacles, however, the outlook for Hollande isn’t entirely grim.

A pragmatist from the right side of the Socialist party, he has already benefitted from comparisons with Sarkozy, Goldhammer says. “[Voters] weren’t that pleased with Sarkozy’s constant dramatization of the situation,” he says. “The fact that Hollande is much lower-key and more relaxed in his approach has pleased a lot of people.”

Forceful leadership on some issues has also won Hollande plaudits.

He promoted European center-left solidarity by inviting Britain’s Labour Party leader Ed Miliband last month in what was seen as a dig at Cameron.

He was also praised for acknowledging the French role in the Holocaust by saying "the crime was committed in France by France."

But Hollande’s average-guy persona was chipped during parliamentary elections in June after his girlfriend, the journalist Valerie Trierweiler, tweeted support for the political opponent of Segolene Royal, Hollande’s former partner and mother of his four children. Quoting Victor Hugo after losing her seat, she warned "Traitors always pay for their treachery in the end."

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Nevertheless, with almost five years as president ahead of him and a strong mandate to implement the legislation planned for the fall, Hollande appears to have a fighting chance.

“It’s a bit unfair that problems that have been brewing for a long time have been laid in his lap," said Goldhammer. "I think the electorate recognizes that and there is still a fair amount of tolerance for the difficult situation he inherited.”

Translator Adrian Garcia-Landa echoed popular opinion by praising Hollande for “listening to people.”

"He's cautious and balanced,” he said. “I’m willing to give him the benefit of the doubt."