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Hollande’s Judgement Day

August 31, 2012

Published in ‘New Europe’, 2-8 September 2012, page 5

Hollande's Judgement DayIn May 2012, the new French President, François Hollande, was elected on the basis of an anti-austerity albeit pro-European ideological platform. Hollande promised to maintain France’s predominance in European decision-making, and at the same time to find another way through the financial crisis, centred on growth rather than austerity.

He went on to promise new hires in the public sector (in education and police), a minimum wage increase, and to bring the retirement age back down from 62 to 60 years, thus abolishing the most significant reform pushed ahead by his predecessor Nicolas Sarkozy.

But most of all, Hollande guaranteed the continuation of the so cherished by the French people generous ‘welfare state’, and along with it the level of public spending at around 57% of GDP, when Germany’s figure is around ten percentage points lower…

In a nutshell, President Hollande’s election was interpreted as a guarantee of maintaining the ‘socialist’ ideal of life in France, a view initiated by François Mitterrand in 1981, and closely followed by all governments, whether left- or right-wing, over the last 30 years. Problem is that the international and European context has changed dramatically since then; since the introduction of the euro, (a mostly French invention), France, like its other Eurozone partners, has lost its monetary autonomy, and cannot devalue its currency, as Mitterrand did twice in the early years of his mandate.

More importantly, France has, just like everybody else, accumulated a public debt through consistent fiscal deficits over the years, that the present financial crisis has deeply accentuated. Financing these deficits brings dependence on the markets and the rating agencies, a reality demonised by Hollande who went as far as to ‘declare war against financial markets.’ In fact, this rhetoric just reveals his weakness against the markets, and the limited room for manoeuvre in pursuing his socialist agenda.

The truth is that France is faced with two hard facts, which point to the opposite direction than the one promised by Hollande: declining competitiveness and banking vulnerability.

Declining competitiveness, as measured by unit labour costs, is the major issue for France. The hourly labour cost in France for 2011 was €34.2, against €30.1 in Germany, and nearly 20% higher than the Eurozone average of €27.6. This is mainly due to high payroll taxes applied on employers. In addition to high taxation, there is a legislation made to protect the employees, which, without attaining the extremes of Italian labour laws, makes firing people quite complicated and costly. As a result, large multinational firms are very skeptical about investing and hiring staff in France, thus contributing to the country’s chronic high unemployment and low level of new investments.

The same trend is also followed by existing companies, which are trying to move their factories abroad, the most striking recent example being the country’s second biggest car manufacturer Peugeot.

On the other hand, the French banking system seems to be extremely vulnerable to the sovereign debt crisis, both because its undercapitalisation and its large exposure to sovereign bonds of countries like Greece and Italy. An example of undercapitalisation is given by IMF’s estimation of the socalled ‘Tier 1 capital’ expressed as a percentage of assets: 16%for US banks, 10% for German banks, under 9% for French banks. Same thing for the leverage (another measure of risk) which is calculated at an average of 17-to-1 for the US banks, against 27-to-1 for the French banks, even attaining 49-to-1 for Credit Agricole, one of the major French banks. This means large amounts of money are necessary to recapitalize the banking system, and as in the economy, “there is no such thing as a free lunch,” such amounts will be missed elsewhere, restraining Mr. Hollande’s choices even further.

To sum up, the judgement day for France is close, a first test being the new budget to be presented in the next month, where a €33 billion gap has to be catered for in order to keep the deficit at 3% of GDP in 2013. The real dilemma is this: keep the old good socialist model of welfare state, as promised by Hollande? Or, stick to the euro and the European construction, as again promised by Hollande and the entire French elite? No magic tricks can make up for a clear-cut political decision here. After all, the future of Europe is at stake.


From → Views & Opinions

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