What happens if Hollande wins?
His political allies wrote him off as a lightweight, “a pedal-boat captain in a storm” as one memorably put it. European leaders, including Germany’s Angela Merkel, have gone out of their way to avoid him, and the markets have been unimpressed by his declaration, to the City of London, that “I am not dangerous.”
Yet with opinion polls in France unanimously predicting that François Hollande will be elected president on Sunday, this is a good time to be asking just how bad his presidency really would be for France, for Europe and for the markets.
If he does win, will he be able to inspire confidence and rebuild and renovate the fragile economy, with its heavy debt, stagnant growth and rising unemployment? Or will he preside over its rapid descent into Greek- or Spanish-style chaos, as Nicolas Sarkozy, the incumbent at the Elysée Palace, keeps warning?
Hollande’s track record gives few clues. He spent years as a Socialist Party apparatchik, serving as party leader during an extended period of infighting and presiding over two stinging election defeats. He’s only where he is today because he was in the right place when Dominique Strauss-Kahn shot himself in the groin.
Yet, unlike the last Socialist Party candidate who was elected president, François Mitterrand, Hollande would take office without heavy ideological baggage. Mitterrand in 1981 nationalized French banks and experimented with a full-scale reflation of the economy before being forced to change course two years later when the French franc collapsed. Hollande admires Mitterrand but lived through the U-turn. He has identified the world of finance as his true enemy, but his proposals are more Glass-Steagall than Lenin: His main plan for French banks calls for a separation of their trading and commercial operations. He calls for a new European emphasis on growth, but his solutions are mild: bigger investment by a French government development bank and a promise to persuade European leaders to launch Eurobonds – a non-starter for Germany’s Merkel.
His program is classic tax-and-spend, of the pre-Clinton, pre-Blair era. There are expensive commitments to row back on Sarkozy’s pension reform, to hire tens of thousands of new teachers and to raise the minimum wage. France already comes near the top of Europe’s league tables for the size of its government spending in relation to its overall economy – more than 55 percent – but this spending will be financed by big tax increases totaling 44 billion euros. They include higher payroll taxes on business and a new marginal income tax rate of 45 percent for those earning more than 150 000 euros. (His full program is detailed, in French, here.) These and other measures will push taxes and social charges up to almost 47 percent of GDP; that’s about 10 points more than in Germany or the UK and 20 points more than in the United States.
Yet this is 2012, and there’s a debt crisis raging, so deficit reduction is on the agenda, too. Hollande is promising that the 90 billion-euro deficit, about 5.2 percent of GDP, will drop to zero in 2017. Look a little closer, and that forecast is premised on economic growth averaging between 2 percent and 2.5 percent for three of the next five years. By French standards, that’s a lot; there hasn’t been a sustained growth spurt that strong since the late 1990s, when global conditions were very different and taxes were going down, not up.
Thomas Piketty , an economist who specializes in income disparities, considers Hollande’s plans to be more credible than Sarkozy’s because they are more clearly financed, even though he regrets that “after 10 years in opposition, his fiscal program is so unimaginative.” But French employers are nervous: Laurence Parisot, head of the main employers’ federation, warns that the new levies will be “a crushing burden.”
If he ends up doing what he says he’ll do, the best-case scenario seems to be that the next five years will be muddle-through ones. Taxes and social charges will go up, as will labor costs. The deficit might or might not come down, while the gulf in competitiveness between France and Germany will continue to widen. That’s not particularly encouraging – “where is the coherence?” asks Matthieu Pigasse, a Lazard banker who supports him (and yes, some bankers do support him) – but it’s not an unmitigated disaster either. In fact, this sort of drift has more or less been the story of the French economy for the past three years under Sarkozy, whose initial reformist zeal was stamped on by the financial crisis. And so far, France has more or less kept afloat.
But what happens if and when crisis comes? Cécile Antonin of the OFCE economic research institute calls the markets a “sword of Damocles” hanging over the next president. Hollande’s choice of aides will be crucial in determining how he deals with that kind of pressure. As party leader he didn’t impose his will but allowed the factions around him to fight out their battles. All those factions have since united around his candidacy and are already sparring behind the scenes to pick up the spoils. In terms of economic policy, there’s a hard left, represented by Martine Aubry, a rival to Hollande for the candidacy and the architect of the costly 35-hour-week policy in the late 1990s, and a reformist left, which was close to Strauss-Kahn.
Two of Hollande’s top lieutenants in the campaign, Pierre Moscovici, the campaign manager, and Manuel Valls, the campaign spokesman, are Strauss-Kahnians. If they get top posts, watch for some deft crisis management and an emphasis on budgetary rigor. But Hollande, who has promised that half the posts in his administration will go to women, may be tempted to appoint Aubry as prime minister. That would mean more pressure to increase social spending and a combative attitude toward the markets. Some people aren’t waiting: Tax lawyers in Paris already report an unprecedented number of wealthy residents taking advice about emigrating.
The unanswerable question is whether a President Hollande could pull off an upside surprise and put in place lasting structural improvements. As Germany found when Gerhard Schroeder was chancellor, a left-of-center leader is sometimes better able than a rightist one to revamp social policy, including hallowed labor market regulation, and create the conditions for years of sustained growth. Yet it’s a sign of the French zeitgeist that it’s Sarkozy, not Hollande, who quotes Schroeder as his model. And as Sarkozy pointed out snidely in a head-to-head TV debate on Wednesday night, Schroeder in this election is supporting him.
PHOTO: François Hollande, Socialist Party candidate in the 2012 French presidential election, shakes hands with supporters after an election campaign rally in Toulouse, May 3, 2012. REUTERS/Regis Duvignau