MacroScope

Hollande’s moment of truth

This afternoon, French President Francois Hollande will expand upon his New Year announcement that French companies who agree to hire more workers could pay lower labour taxes in return and find themselves less tied up in red tape. Unemployment is running near to 12 percent and Hollande’s vow to get it falling by the end of 2013 fell short.

Unfortunately, the announcement has been eclipsed by his threat of legal action after a French magazine reported he was having an affair with an actress. France tends to overlook its politicians’ peccadilloes but with the economy in a hole, Hollande risks facing the charge that he should be focusing squarely on that.

To complicate matters his partner, Valerie Trierweiler, has been admitted to hospital following the reports. She will stay there for a number of days yet.
Given this is one of only two news conferences that Hollande has promised to give each year it’s hard to see how he can avoid it being hijacked by his personal life. As boxing promoter Don King was fond of saying: there are two chances, slim and none and Slim just left town.

The usual omerta about politicians’ private lives has been broken with opposition UMP leader Jean-Francois Cope calling it disastrous for the image of the presidency.

Even so, the odds are this squall will blow over so the far bigger question is about Hollande’s appetite for economic reforms. He has attracted criticism from abroad for being too timid in his shaking up of the labour market and the welfare state and is hoping this policy will prove to be a game changer.
It is risky. Giving a tax cut to companies means either raising taxes on ordinary people, cutting back state spending or both – not a vote winner any way round. But with his approval ratings at rock bottom, Hollande may feel he has little left to lose. He has already declared it time to stamp out abuses of a generous welfare state, and cut public spending to create room for tax reductions after a series of rises.

New face at the ECB

The European Central Bank held a steady course at its first policy meeting of the year but flagged up the twin threats of rising short-term money market rates and the possibility of a “worsening” outlook for inflation – i.e. deflation.

The former presumably could warrant a further splurge of cheap liquidity for the bank, the latter a rate cut. But only if deflation really takes hold could QE even be considered.
Sabine Lautenschlaeger, the Bundesbank number two poised to take Joerg Asmussen’s seat on the executive board, breaks cover today, testifying to a European Parliament committee. A regulation specialist, little is known about her monetary policy stance though one presumes she tends to the hawkish.

Iran and the EU announced on Sunday that a deal between Tehran and six major powers intended to pave the way to a solution to a long standoff over its nuclear ambitions will come into force on Jan. 20. Thereafter, negotiations will begin on a final settlement. Brent crude has fallen in response. It’s early days but if oil falls significantly this year, that will factor into fears about deflation taking hold in Europe.