What happens if Hollande wins?

By Peter Gumbel
May 3, 2012

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

 

7 comments

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[...] interesting analysis/opinion article from Reuters about the forthcoming French elections, worth your morning coffee. Rate this: Spread the word:EmailPrintFacebookTwitterLike this:LikeBe [...]

There has been far too much respect and honor given to Mr Market principal sponsors, the “Sword of Damcoles -i.e the wealth destroying protagonists that a dose of Mr Hollande’s prescription couldn’t have come at a more timely manner this Sunday -exactly what we need now, to blunt those swords that are killing us.

Posted by rissey | Report as abusive

“but his proposals are more Glass-Steagall than Lenin”

Well then, he’s not a socialist. He’s a social democrat like FDR or Truman.

Sounds good to me. Too bad we can’t get that here in the USA. Here we get Business Evil (Romney) and Business lite (Obama) – BOTH are center-RIGHT.

Man, could we really use some center or center-left here.

Posted by Lord_Foxdrake | Report as abusive

[...] for Europe and for the markets.If he does win, will he be able to inspire confidence … (read more) This entry was posted in Uncategorized by admin. Bookmark the [...]

It seems clear that the collection of policies called “Free Trade” have failed the West miserably and must be reversed. For those who would dislike what that implies, you had better find a way to improve results soon.

A movement against the financial industry and low tariffs will likely be the next move throughout the EU, USA, Canada, Australia. How hard is it to recognize failure? The policies were sold as being good for whole societies, not just for billionaires.

Posted by usagadfly | Report as abusive

Inside sources have disclosed that Monsieur Sarkozy & Fräulein Merkel intend to elope just before the French elections.Sources close to the couple said arrangements for their honeymoon have been already completed, and they have booked a very exclusive private villa on a Greek island.

The couple have reportedly expressed to close friends that their love for each other is much more important to them than their love for the EU.

Reporting farther into the Sarkozy-Merkel Eloping Affair reveals that the local Greeks of the undisclosed honeymoon-island are preparing a very special & very private welcome ceremony for the couple.

For Fräulein Merkel the local leather craftsmen are preparing a one-of-a-kind black leather wedding gown, high heel shoes, panties & bra.

A very expensive black leather whip was gifted to the couple from the Hellenic Equestrian Federation, chaired by Fräulein Merkel’s German uncle. The leather strips for the whip were made from the very rare olive color Greek suicide victims skin.

Goldman Sachs is sending them a NY Yankees Black Leather Bat, and Duane Reade Pharmacies is providing a gift baskets containing jars of Vaseline & tubes of Preparation-H. The couple has indicated that they will be spending much time on vigorous sport activities.

Also the local blacksmith has obtained Monsieur Sarkozy’s neck, wrist & ankle measurements for some special metallic jewelry to be custom made for him from smelting Euro coins. The African French Colonies Association has provided a rare antique chain used on slave ships, to complete Zarcozy’s outfit.

For the poor villagers themselves, they are counting on the French garden snails & sauerbraten the couple has promised to bring along.

However many of them have not yet dismantled their Easter lamb skewers as they were not used, all the lambs had been shipped to Germany & France, suggesting that they might have other intentions for their use.

All in all, this is expected to be one of Europe’s most celebrated events, ever.

Posted by GMavros | Report as abusive

[...] Les journalistes financiers britanniques et américains se demandent quel président sera François Hollande s’il remporte l’élection. «Sera-t-il capable de restaurer la confiance, de redresser une économie fragile? Ou bien présidera-t-il à une rapide descente aux enfers, suivant le chemin de la Grèce?», s’interroge Peter Grumbel, éditorialiste à l’agence Reuters. [...]

The author states that the “35-hour-week policy” was “costly”, implying that a 40 hour work week is somehow superior and more cost effective. But is it?

How are readers to know that this is a fact? We are not specialists in French economics. Since the author has not supported his statement, I suspect this is merely his opinion.

A shorter work week allows more people to be employed, because the hours of employment are shared. So how is that costly?

Following the author’s implied logic, perhaps he would prefer a 50 hour work week instead. Anyone in favor?

Posted by DifferentOne | Report as abusive

I wished we had a 35 hour work week. I did a little research and found an article on CBS News about France dropping the 35 hour week. One of the problems was that most countries work more than 35 hours a week so France is not as competitive as other countries. The article also says “salary stagnation that is now difficult to emerge from.” Somehow the 35 hour week led to salary stagnation. Also the 35 work week was suppose to create millions of new jobs but it did not happen. One interesting thing mentioned in the article was that the Germans also have a 35 hour basic work week yet they have the best economy in Europe.

Posted by jorge62 | Report as abusive

But what happens if and when crisis comes?
– Peter Gumbel

“If”? “When”?

This sounds like a ploy. As the crisis continues, Peter Gumbel and others in the financial world will blame the Socialists – again.

Just be honest with the public, Peter. When you make such an outrageous statement, everything else you write is suspect. The very reason Sarkosy lost – more than Hollande wwwon – is because the “crisi” has been here for three years.

Posted by FarRtWing | Report as abusive