What Hollande can learn from Queen of Hearts

By Gary Regenstreif
May 21, 2013

French President Francois Hollande’s predicament is, oddly enough, akin to one Alice faced in Lewis Carroll’s 19th century classic.

A year after taking power, Hollande is buffeted by the lowest popularity of any modern Gallic leader, a record number of jobless, a recession and shriveled business investment – while still needing to cut his budget deficit to hit European targets.

The protagonist of Alice in Wonderland, meanwhile, confused by her strange encounters down a rabbit hole, meets the Queen of Hearts, who tells her: “My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere, you must run twice as fast as that.”

The Socialist leader, says AXA Group Chief Economist Eric Chaney, is in a rabbit hole.

“The situation is much worse in France in the past year,” Chaney told me from Paris, where AXA, Europe’s No. 2 insurer, is based. “Italy and Spain are implementing reforms. France is doing nothing. So it is getting closer to the periphery [of weaker European nations]. What the queen said to Alice applies to France.”

What Chaney wants – as do many French business chiefs and citizens, as well as European leaders – is for Hollande to run twice as fast.

It is not that Hollande, voted in vowing to focus more on growth in the euro zone’s second-largest economy and less on austerity, has been inactive. But some of his actions have backfired and others have not gone far enough. So far, there has been little to show for his economic policies.

The president needs to convince five key constituencies: First is the French public. Only 25 percent approved of Hollande in a recent poll, the lowest recorded in more than 50 years. This is even more noteworthy, given the brevity of his electoral honeymoon.

But the gloominess of the French also matters outside their country’s borders, since France, with Germany, is at the “core” of Europe. French citizens’ rapidly declining confidence in the economy, in Hollande’s leadership and in the country’s overall commitment to the European Union was highlighted in the Pew Research Center’s recent survey of eight EU member states.

“No European country is becoming more dispirited and disillusioned faster than France,” the Pew authors concluded. “France has always bridged Europe’s north and south. Now, measured by a number of indicators, the French look less like Germans and a lot more like the Spanish, the Italians and the Greeks.”

Hollande’s second major constituency is business. With investment and confidence dried up, CEOs want to hire again only when it will help them grow profitably. Tax hikes on companies early in Hollande’s term, and occasional anti-business rhetoric from some ministers, have left many entrepreneurs frustrated with Paris as they struggle with tough market conditions. The taxes and social charges have shrunk French companies’ profit margins to among the slimmest in Europe.

Meanwhile, companies have given an unenthusiastic welcome to a tax credit scheme that Hollande’s government hoped would make them more competitive in international markets. Hollande also had to scrap plans for a 75 percent tax on people earning more than a million euros, a high-profile campaign pledge, after a constitutional court ruled it confiscatory.

Maurice Levy, the chief executive officer of Publicis Group, the French multinational advertising and public-relations firm, wrote in the Financial Times last week that he had commissioned studies that showed the French were ready for change.

“Petrified by the fear of losing their rank – both individually and as a nation – the French are troubled by the absence of real reforms that might light a path out of economic gloom,” Levy wrote. “The French left still cherishes the fantasy that it can redistribute wealth that the nation no longer produces. The French have a reputation for protest rather than action, so it is remarkable to note how many survey respondents called for concrete and far reaching changes, including tax cuts and structural reforms.”

Third is Brussels and other euro zone partners. Hollande has just received a waiver from the European Commission granting him two extra years to cut the French budget deficit to below 3 percent of gross domestic product. But the quid pro quo from EC President Jose Manuel Barroso was that Paris had to push ahead faster with economic reforms, to make up for 20 years of lost economic competitiveness and reduce what he called “the exorbitant weight of debt” on its economy.

Paris forecasts French debt will hit 93.6 percent of output this year, and will keep growing next year.

Fourth is financial markets. French bond yields are low, suggesting that markets consider France a safe investment. Chaney of AXA predicts, however, that when the U.S. Federal Reserve starts to end its $85 billion in monthly bond purchases, investors will look more carefully at fundamentals. Then, France’s strength compared with other countries will face greater scrutiny.

Fifth is Hollande’s political family – the French left. While he has a fairly strong majority in parliament, if he pushed too hard on such reforms as spending cuts, pensions and more labor law overhauls, he would risk a rebellion by Socialist Party members. Would he then want to rely on the center-right opposition, the Union for a Popular Movement, or UMP, to pass those reforms? Much of Hollande’s hesitancy is about not wanting to alienate the left.

Additional risks to Hollande could be the kind of embarrassing scandals involving members of his government and public jibes among members of his Cabinet that he has seen in recent months. Popular unrest and credit downgrades could trigger other jolts.

Hollande is banking on a few key initiatives this year to convince France’s European partners that he is determined to revamp the economy. Last week the French parliament passed a reform of the country’s labor code. This legislation makes it easier for firms to make layoffs or reduce pay and working hours for limited periods in economic downturns, but it raises the cost of employing staff on widely used very short-term contracts. Although companies say the measure will help them better manage costs in a downturn, few expect a quick improvement in the competitiveness of French exporters – with Chaney calling it “a drop in the ocean.”

Hollande has made a pension revamp a top priority this year. He is also eager, however, to avoid a repeat of the 2010 mass street protests after his predecessor, Nicolas Sarkozy, raised the retirement age to 62 from 60. Hollande moved it back to 60 with one of the first strokes of his presidential pen.

But with the prospect of a 20 billion euro ($26 billion) annual shortfall in the pension system by 2020 if he does not act, Hollande now acknowledges that the French will have to work longer. An Ipsos poll this month showed almost two-thirds of the French would support a pension reform more drastic than that envisaged by Hollande, notably with a higher retirement age. Hollande declares he’s going “on the offensive” to bolster the economy. This is the man who a year ago was embraced by the French for being a welcome change from the hyperactive, center-right Sarkozy. Hollande capitalized on that, calling himself Mr. Normal.

With polls suggesting that French public is ready for change, with business pressing for it and with the rest of Europe demanding it, Hollande may do well to become Mr. New Normal.

Or he will struggle to get out of the rabbit hole.

 

PHOTO (Top): France’s President Francois Hollande (R) and Finance Minister Pierre Moscovici (L) in Avoudrey, eastern France, May 3, 2013. REUTERS/Charles Platiau

 

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