Hollande’s search for an elusive winning formula

April 1, 2014

After a local election drubbing, French President Francois Hollande duly sacked his prime minister last night and tempered his economic reform drive, vowing to focus more on growth and “social justice”. A fuller cabinet reshuffle is expected today.

Interior minister Manuel Valls, anything but a left-wing firebrand whose appointment could stir unrest on the left of the ruling Socialist party, takes the premiership with a mandate to pursue cuts in labour charges for business but also tax cuts to boost consumer spending and employment.

Hollande said France would still cut public spending to pay for a 30 billion euro reduction in labour charges on business, part of a “responsibility pact” with employers he launched in January. But he said Sunday’s elections also showed the need for a “solidarity pact” offering workers tax cuts and assurances on welfare, youth training and education.

Brussels would have to cut it some slack with its budget deficit, he said. Paris has already been given until the end of 2015 to bring the deficit below the EU limit of 3 percent of GDP. Data released on Monday showed the deficit stood at 4.3 percent in 2013, higher than the government’s 4.1 percent target.

Some of the euro zone and EU finance ministers meeting in Athens, which has the EU presidency for six months, may well look askance at all that. Southern European countries have endured sharp economic pain to reduce their debts while Germany remains doubtful of the austerity/growth trade-off which Hollande is pushing.

Also high on the “informal Ecofin’s” agenda will be disbursement of delayed tranches of loans that have been promised under Greece’s two rescue packages. Beyond that, further help is likely to be required with figures of up to 20 billion euros bandied about. But officials say that will not be actively discussed yet.

Greece aside, Portugal’s looming bailout exit may be on the table – and whether it requires a precautionary credit line which Ireland eschewed – as will signing off on the final details of banking union and preparing a common line for the upcoming G20/IMF meeting in Washington. But the main focus will be on the threat of deflation.

After euro zone inflation dropped further, to 0.5 percent last month, manufacturing PMI surveys for euro zone members and the UK today will be scrutinized for the strength of economic recovery. European monthly vehicle registration figures and the euro zone unemployment number will add to the mix.

China’s PMI has struggled again, reinforcing fears of a sharper-than-expected slowdown at the start of 2014, though that in turn raises the prospect of some form of state stimulus.

The European Central Bank is under pressure to act but will probably point to the drop in inflation being due to factors such as falling food prices that are likely to reverse.

Reuters polls suggest the central bank will take no action at its monthly meeting on Thursday. But even its hardliners are saying QE is not out of the question if deflation really takes a grip, and there is active discussion of cutting deposit rates paid to banks to park their money at the ECB into negative territory to counter a strong euro, which threatens to depress inflation yet further.

In Athens, EU economics chief Olli Rehn is out saying a prolonged period of low inflation would hurt efforts to rebalance the euro zone economy. It would certainly make it harder to cut still-high national debts.

Italian premier Matteo Renzi is in London for talks with David Cameron.

NATO foreign ministers meeting in Brussels will decide new steps to reinforce eastern European countries worried by Russia’s annexation of Crimea, and will discuss how to bolster Ukraine’s armed forces. They will look at options ranging from stepped-up military exercises and sending more forces to eastern members states, to the permanent basing of alliance forces there – a step Moscow would view as provocative.

The United States has already increased the number of U.S. aircraft in regular NATO air patrols over the Baltic States and beefed up a previously planned training exercise with the Polish air force.

Russian Prime Minister Dmitry Medvdev angered Kiev yesterday by visiting Crimea and holding a government meeting there. But in a possible sign of de-escalation, Russia pulled some troops back from near Ukraine’s eastern frontier – a move the United States said would be a positive sign if it is confirmed as a withdrawal.

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