France: End of the affair

France’s share of world trade had fallen by a third since 2002

By Hugh Carnegy 

One year into office, François Hollande’s economic management has sparked fears of a social breakdown

Hanging off lampposts, waving flags, lighting flares and cheering wildly, tens of thousands of supporters of François Hollande crammed into the Place de la Bastille in Paris at midnight to greet France’s first socialist president for almost two decades.

“I will live up to your hopes,” he promised the exuberant crowd.

How things have changed in the space of a year.

Waiting at the Bastille in a milling throng of trade unionists for the start of the traditional May Day workers’ parade, Emmanuelle, a civil servant who declines to give her family name, recalls the victory scenes with a resigned sigh.

“I was here that night,” she says. “There was an atmosphere of great hope. Now we are all very disappointed. All the promises – especially to stop companies laying off workers – have not been met.”

Amadou Diop, a student, echoes the sentiment. “I am very disappointed. His social record is bad. He hasn’t stopped the job losses. There is a feeling that the country is plunging into decline and there is a lack of hope.”

Problems have only mounted for Mr Hollande since he took power last May from Nicolas Sarkozy.

The economy has shuddered to a halt. Unemployment has climbed above 10 per cent of the workforce; the government has delayed hitting its targets for reducing the budget deficit and public debt; and the country continues to suffer from a worrying loss of international competitiveness, with the trade deficit standing above €60bn, in sobering contrast to Germany’s hefty surplus.

There is restiveness within Socialist ranks over plans to cut spending, which has flared into attacks on German Chancellor Angela Merkel – seen as the author of austerity. This has undermined France’s position as Europe’s second-biggest power and traditional joint driver of the EU as the eurozone struggles to shake off years of economic crisis.

“The loss of competitiveness and the drift in the public finances are dangerous, not just for the outlook for France but for relations with Germany,” says Eric Chaney, chief economist at Axa, the insurer. “Germany needs a trusted ally and France is less qualified with a weak economy and public finances.”

Mr Hollande has marked his anniversary by insisting that he remains committed to pulling the public finances back into shape, reducing the bloated public sector and rejuvenating the economy. But his critics say he has wasted his first year with wrong-headed tax increases and a lack of bold reform. Looking isolated and unpopular, he faces a mighty task if he is to turn round the country’s prospects – and his own.

It is a task that many now doubt Mr Hollande is up to, not least in the business community. In a recent waspish comment, Alain Minc, a prominent business consultant and adviser to Mr Sarkozy, said Mr Hollande would make “a fantastic social democratic prime minister of a Scandinavian country” but was not suited to being the “monarchical” president of France.

“He runs the country like he is general secretary of the Socialist party. It doesn’t work like that,” Mr Minc said in an interview with Les Echos.

Never in France’s postwar history has a new president suffered such a precipitous decline in popularity and confidence. With support tumbling on his own Socialist side as well as to his right, Mr Hollande’s approval rating has slid from more than 60 per cent in his early weeks to as low as 24 per cent today.

Beyond his personal lack of popularity, there is a broader “morosité” that seems to have infected the country. An Ifop poll last week found that 70 per cent of French believed a “social explosion” was possible in the coming months.

Further problems have been stirred into the pot. A damaging scandal broke in April when Jérôme Cahuzac, the budget minister, was revealed to have been using a secret Swiss bank account. An angry protest movement also continues to fight the president’s law to allow gay marriage.

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But Mr Hollande appears remarkably sanguine. Visitors to the Elysée Palace say he has lost none of his trademark amiability, greeting guests with a friendly handshake and cracking jokes.

Some believed that when he ordered French troops into Mali in January for an operation to oust Islamist militants threatening to over-run the country, it presaged a new, more forceful Hollande. But the Elysée resists suggestions that France requires Churchillian leadership, saying promises of a hard slog leading to ultimate victory would not be accepted as credible.

Pleading that it is hard to address the joint problems of competitiveness and public finances when there is no growth, Mr Hollande tells visitors that he must be given time to reform “carefully at a good rhythm”. To go faster would split his fractious Socialist party and its leftist allies, fuel opposition on the far right, push up unemployment in the short term and risk provoking protests in the street.

The president rejects criticism that his emblematic commitment to a 75 per cent marginal tax rate was damaging to business. He has been known to point out that as an election ploy, it worked very well. But recently he has moved to reverse the imposition of high capital gains taxes on investors, acknowledging that they were a mistake.

Mr Hollande has set out a relatively modest reform path. He is addressing competitiveness via a €20bn tax cut for companies to offset their high labour costs, and an agreement between employers and trade unions to loosen the rigid labour code. The government promises to tackle pension reforms, the high cost of unemployment and family benefits, and wasteful local government and health spending in the quest to cut a public spending bill that amounts to 57 per cent of gross domestic product.

Comforted by record-low borrowing costs for France’s sovereign debt, the mantra is a commitment to budget responsibility – but without “austerity”, by which Mr Hollande means harsh cuts in public services, employment and wages that he has always rejected. With austerity, the Elysée warns, looms the threat that European governments will “fall one after the other”, with populists filling the vacuum.

The president’s critics, who want to see faster progress on public spending and structural reforms, are far from convinced. “What the government has done so far is insufficient,” says Mr Chaney. “Given the worsening of the economic situation, a gradual approach is a luxury the government does not have. The lack of competitiveness has a cumulative effect. Once you have lost market share it is much more difficult to regain it.”

He warns that Italy, and especially Spain, are fast gaining competitiveness against France. But there is little sign so far that the government is preparing to go faster – or further, in areas such as labour market reform and shaking up restrictive practices in product and service markets, as the European Commission and other international institutions have urged.

Meanwhile, Mr Hollande’s anti-austerity stance has hardly endeared him to Ms Merkel. Tensions have been exacerbated by recent comments from within the Socialist party attacking Ms Merkel’s “selfish intransigence” and calling for “confrontation” with Berlin.

Mr Hollande says France must find compromises in what he calls “friendly tensions” with Germany. Elysée officials reject the notion that France’s weakness has reduced it to the “top of the second division” in Europe, leading a poorer south against a richer north.

But Paris’s ability to press its case against German resistance on issues such as eurozone banking union, mutualisation of debt and more intervention to stimulate growth by the European Central Bank – not to mention Mr Hollande’s call for Berlin to do more to stimulate Germany’s economy – is weakened by France’s own economic fragility.

“It is a very rocky patch for the bilateral relationship that is aggravated by a feeling that Hollande does not have control over his troops,” says Thomas Klau of the European Council on Foreign Relations in Paris. “There is considerable mutual distrust and a lack of understanding of each others’ policy positions.”

Since the Cahuzac crisis, calls have mounted for Mr Hollande to reshuffle his government and make a new start, including replacing Jean-Marc Ayrault, his loyal but lacklustre prime minister. Candidates proposed for inclusion include Louis Gallois, former chief executive of aerospace group EADS, and Pascal Lamy, head of the World Trade Organisation, whose term ends in August.

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Mr Sarkozy’s UMP party is demanding a wholesale renewal of people and policies to fend off further decline. “If François Hollande does not very rapidly take measure of the situation, I fear a fragmentation that will make France very difficult to govern,” warned François Fillon, prime minister under Mr Sarkozy, in an interview with Le Figaro on Saturday.

Mr Hollande is also under pressure from the left, with Jean-Luc Mélenchon, leader of the Left Front and an election ally against Mr Sarkozy last year, coming out in open opposition by leading a big street demonstration against government policy in Paris on Sunday.

Inside the Socialist party, there is growing nervousness, fuelled by open dissent about Mr Hollande’s policy from some ministers and among members of parliament. “It’s not easy,” says Fleur Pellerin, a rising junior minister for small business and the digital economy. “It is important we have a single voice. But we have a very diverse majority so it is difficult. There have to be compromises.”

Mr Hollande has so far signalled that he will hold on to Mr Ayrault – but many expect a shake-up and streamlining of the other 35 ministers by the end of the summer. However, it would be a break with his style of political management for there to be a significant shift in policy in favour of more radical reform.

If there was, it would almost certainly come as a further disappointment to those who returned to the Bastille for this year’s subdued May Day march. “I voted for Hollande because I wanted to get rid of Sarkozy,” says Jérôme, currently studying for a doctorate in sociology, as he smokes a roll-up cigarette. “The worst thing is having a government that calls itself left but is just the same as the last one.”

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In pursuit of more urgency from Paris

The rising mood of resentment in France about Germany’s commitment to fiscal rectitude has been received in Berlin more in sorrow than in anger, writes Quentin Peel.

The sharp attack on the economic policy of Angela Merkel that emerged from François Hollande’s Socialist party in April was dismissed by Steffen Seibert, her official spokesman, as “mere background music which we notice, but which doesn’t count”.

In Germany, the criticism most commonly heard of Mr Hollande is that he is more of a “party secretary-general” and has yet to become truly presidential. The familiar period of Franco-German readjustment that follows any change of government in Paris or Berlin is definitely taking longer than was expected. Although both leaders agreed to draft a common strategy to boost competitiveness when they celebrated the 50th anniversary of the Elysée treaty in January, officials say that no progress has been made.

German fears about declining French competitiveness were spelt out in a report by the economics ministry published in the newspaper Handelsblatt last week. “French industry is losing competitiveness at an increasing rate,” it said. “Enterprises are continuing to move out of the country.” It compared German average hourly wage costs of €30.40 with France’s €34.20, pointing out that France’s share of world trade had fallen by a third since 2002.

Berlin’s concern is that France should remain a partner in stabilising the eurozone. But German leaders fear that France is moving too slowly.

One German minister recalls that Gerhard Schröder, Germany’s last Social Democrat chancellor, took four years to realise that structural reform was essential. “I hope Mr Hollande won’t take four years to correct the mistakes of his election promises,” he concludes.