Is Hollande more like Rajoy or Monti?

By Hugo Dixon
November 19, 2012

Is Francois Hollande more like Mariano Rajoy or Mario Monti? In other words, is the French socialist president condemned to be always behind the curve with reform like Spain’s conservative prime minister? Or can he get ahead of it like Italy’s technocratic premier?

I put this question to my fellow guests at a dinner in Paris last week. France is not in imminent risk of blowing up, as wrongly implied by the Economist magazine, which used a cover picture of a lighted fuse on baguettes tied together like sticks of dynamite. France is much richer than Spain and its people are more willing to pay their taxes than the Italians. French 10-year borrowing cost is only 2.1 percent, compared to Italy’s 4.9 percent and Spain’s 5.9 percent.

That said, the country has three deep-seated problems which could ultimately cause a mega-crisis: public spending at 56 percent of GDP is way too high; industrial competitiveness has steadily eroded; and the population is in a state of denial. The last cannot be said of either Italians or Spaniards.

Hollande certainly started off like Rajoy. During his election campaign, he did nothing to prepare the population for the sacrifices ahead. Instead, he made promises he couldn’t keep. The French president spent his first few months in office merrily attacking the wealthy, pushing up taxes and partly reversing his predecessor’s pension reform. This anti-enterprise message has knocked the trust of the business community – which is precisely the opposite of what France needs as it flirts with a renewed recession.

Hollande, like Rajoy, is a politician. He had to get elected, a process which almost invariably forces leaders to sugar-coat their messages. Monti, by contrast, didn’t have to face the ballot box and so hasn’t had to go back on any promises. He also had a clear idea of what problems Italy faced – unlike Hollande and Rajoy – and so didn’t need to waste time learning on the job.

Hollande and Rajoy have been forced into U-turns – in both cases, for example, putting up VAT – partly as a result of which their popularity has plummeted. Hollande’s approval rating has sunk to only 36 percent from 60 percent when he took office six months ago. Monti’s popularity, though, remains high.

That said, Hollande seems to be more adept at making U-turns than the Spanish PM. The increase in VAT will be used to compensate for part of the revenues lost caused by a 20 billion euro cut in taxes on employers. This is a classic “internal devaluation”, which will go some way towards restoring France’s competitiveness. The rest of the money for funding this tax cut will come from spending cuts – again a good move, even though the precise reductions haven’t been specified. Hollande also largely adopted the recommendations of a report on competitiveness he’d commissioned from Louis Gallois, the former EADS boss.

The French president also started softening up the population for the need for reform in a widely praised press conference last week. That’s important because it suggests that he, at least, is no longer in denial. What’s not clear is whether a leader who has lost the trust of parts of both the business community and the electorate can drive through further changes.

In the last 30 years, several attempts at reform in France have been abandoned in mid-course. Governments capitulated to street demonstrations and strikes protesting against even minor reductions of privileges. The Greeks and Spaniards look stoical in comparison.

The internal devaluation was a dry run for Hollande’s big test: reforming the sclerotic labour market. More flexibility is needed to keep labour costs down and encourage business to invest – both of which will be required to stop the unemployment rate rising too much from an already uncomfortable 10 percent.

Unfortunately, two big changes aren’t on the cards: an abandonment of France’s 35-hour week and a cut in the minimum wage. However, it will still be possible to make improvements to competitiveness if the package is sufficiently radical.

Hollande hasn’t yet spelt out what he wants. Instead, he has asked employers and unions to sit down and negotiate a new deal. That was one tactic employed by Monti that didn’t prove effective. Italy’s resulting labour reform is half-hearted.

That said, the Medef, the French employers’ association, has come out with a robust initial opening position in the negotiations. What’s more, a socialist is probably better placed to persuade the unions of the need to change than a conservative president. So the question really comes down to how much courage Hollande has.

My dinner companions and others I saw in Paris were divided on the topic. Some said he would only ever do the minimum at the last moment possible. One argued that, while he was good at navigating political shoals, he has no sense of direction. Others said he was a natural optimist who understands that change is necessary but underestimates its urgency. One, though, said he might surprise everybody by realising that reforming France was his historical opportunity and that he would then display audacity. We must all hope this is the correct assessment.

5 comments

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Actually, if you look at the dinner companion assessments, they are not contradictory. Cornered like a rat, with no other options and a clear set of changes to be made, even Hollande might yet be a leader.

Posted by ARJTurgot2 | Report as abusive

But of course, Hollande MUST follow in the steps of the great Rajoy & Monti – look how great their respective countries are doing, totally booming… Absolutely brilliant results, in both Spain and Italy, right? Just look at the statistics data.Not to forget Greece, which is also blossoming, under the tender care of its puppet government and The Troika…and Portugal…and Ireland…and Slovenia…and Cyprus…and the Czechs…and pretty much the rest of “European Austerity Union” a.k.a. “The Collective Suicide Pact”. All of them great examples of “supply side reforms” and their effectiveness.
Of course annihilating the last remnants of the welfare state, further reducing aggregate demand by slashing wages, reducing the taxes of the rich is proving SO effective throughout Europe, right? And hopefully we will all become mercantilist states like Germany and export our way to growth. The problem is, there is NO WAY you can collectively pursue export led growth strategies at the same time – someone must be a net buyer. If everybody is applying “internal devaluation” and slashing spending at the same time there is no one to buy. There must be SOMEONE BUYING YOUR STUFF. You think China/India/Brazill etc. will buy it? Don’t hold your breath.
The only thing we will achieve is devastate our economies and populations trying to internally devalue enough to become “competitive”. Good luck beating the third world by internal devaluation.

Posted by DLT | Report as abusive

Blah, Blah, Blah; More right wing propaganda Bovine Scat.

- Build Internet 3.0
- Build a smart grid
- Build cheap clean energy production (wind, solar, tidal)
- Build improved rail, mass transit

- Tax the top 1% at 90% (less than it was during WWII)
- Tax the next 10 % at 75%
- Tax the next 14 percent at 60%

- Limit those that receive entitlements to 1 child per family; 2 for everyone else but NO entitlements.

- Free education for all.
- Free health care for all.

- No Social Security for those with a NET WORTH over 2 million dollars in assets.

- Regular Social Security benefits at age 65 for everyone else.

- Corporate Tax at 30%, NO LOOPHOLES, NO foreign capital exemption.

EVERYBODY PLAYS THEIR PART, NO ONE QUITS. Death to those that do.

Posted by Foxdrake_360 | Report as abusive

In Italy we have a saying , if you want no change talk about nothing but change. Monti fully understands that concept. Apart from VAT rises, surcharges on fuel and a tax on first houses nothing has changed but he talks the talk. We are massively over governed but he has only tinkered with local government reform , we are over unionized but he he has achieved no meaningful reform . We are uncompetitive but his fuel surcharge made us less so. Sometime in 2013 the smoke and mirror “reforms of Monti” will come home to roost . What Italy needs is a weak euro but Monti and his technocrats see themselves as saviour ‘s of a strong Euro long before they worry about the effect on Italy. He has said he wants to be a founding father of a unted states of Europe and that rather than saving Italy is his focus.

Posted by Ferkin | Report as abusive

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