Will France face facts?

Hollande's campaign promises give way to reality

By Tim Bardon

French President Francois Hollande swept into power in May by offering a catnip agenda to France's struggling rank-and-file: Higher taxes on the wealthy and corporations, more government-subsidized jobs, more protection for pensions and entitlements and more protectionism would lead France back to prosperity.

So far, so bad.

Hollande's approval ratings have fallen fast — from 54 percent in August to 43 percent today. France's economy is getting more stagnant. Unemployment is at 10.3 percent and rising.

Talk about a short honeymoon.

Hollande is begging France for patience. "I ask to be judged on results, and that is something that requires time," he said.

But his nation is under increasing pressure to come to grips with economic reality.

The French banking sector eventually may need a German-led bailout. But the rest of Europe has no interest in assisting France if it's going to keep spending money it doesn't have. Chasing away business through punitive tax increases only will make matters worse.

Hollande has grudgingly started to acknowledge reality.

Within weeks of taking office, Hollande started to scale down the gawdy spending plans of his Socialist Party. He announced that France will need to reduce its deficit by more than 30 billion euros next year. That goal runs smack into his pledge to create loads of state-sponsored jobs, including 150,000 subsidized jobs for unskilled youth and 60,000 teaching posts. A business group estimated that his jobs plan would cost more than 11 billion euros over five years.

Another reality check: Confiscatory tax rates have consequences. Much attention has been paid to the 75 percent tax rate that Hollande pledged to impose on incomes above 1 million euros. That prospect is said to have prompted France's richest man, luxury-goods magnate Bernard Arnault, to seek Belgian citizenship.

As layoffs have mounted at bellwether companies such as automaker Peugeot, airline Air France-KLM and retailer Carrefour, Hollande has reluctantly acknowledged that France risks losing its competitive edge. He has spearheaded a long-overdue effort to relax French labor rules, which are among the strictest in Europe and which contribute to some of the highest labor costs in Europe. The education and training of young workers in France also demands attention, amid skyrocketing youth unemployment.

France still could pull itself together over time.

Hollande's 2013 budget proposal, expected to be released on Friday, will be a crucial test. France, like the U.S., lost its AAA credit rating from Standard & Poor's. If the budget fails to address the nation's rising debt, expect a downgrade from the rival Moody's rating agency. France still funds its government borrowing at rock-bottom interest rates, but credit markets could swing against it in a hurry.

France at the moment is wedged between the strongest economy (Germany) and the weakest economies (Italy, Spain, Greece, Portugal) in Europe. To keep France from falling in with the basket cases, Hollande needs to deliver a realistic budget plan. No more catnip. He needs to acknowledge that his economic prescription was good politics but bad economics.