We have updated our Terms of Use.
Please read our new Privacy Statement before continuing.

Sins of omission

12 Mar 2012 By Hugo Dixon

Francois Hollande’s sins are more those of omission than commission. The headlines might suggest otherwise. The socialist challenger to Nicolas Sarkozy as France’s next president has promised to cut the pension age to 60, tax the rich at 75 percent, renegotiate Europe’s fiscal treaty and launch a war on bankers. But these pledges aren’t as bad as they look. The real problem is that Hollande, who has a strong lead in the opinion polls, isn’t addressing the need to reform the country’s welfare state.

Hollande is a moderate. Like Sarkozy, for example, he is promising to cut the budget deficit to 3 percent next year, from 5.8 percent as estimated by the European Commission in 2011. But he still had to throw the left some red meat in the election campaign, which runs until May. That’s not just to prevent votes drifting to Jean-Luc Mélenchon, the far-left candidate. It’s also to avoid being outflanked by Sarkozy’s own populist attacks on corporate fat cats and bankers.

Still, the precise pledges probably aren’t what they seem, as I discovered on a trip to Paris last month.

Look at pensions. Hollande has said he’ll cut the pension age from 62 to 60 – at a time when Germany and other countries are raising theirs to 65 or more. But the fine print is more nuanced. This lower retirement age will only apply to people who have worked 41.5 years – in other words, since the age of 18. Given that increasingly people start working later, less than 5 percent of the workforce is affected, according to UBS.

Or take the 75 percent tax rate on income above 1 million euros. If Hollande as president really instituted such a rate, he would drive most of France’s remaining big earners off shore. But within hours of advocating the measure, an advisor was saying off the record that it might last only a few years. By the time it comes to implementation, enough exceptions and loopholes could also have been introduced to reduce the measure’s real bite.

Much the same goes for Hollande’s promise to renegotiate the euro zone’s new fiscal compact treaty. He is, in many ways, right to criticise this mutual austerity pact, the brainchild of Germany’s Angela Merkel. The snag is that he has no chance of changing the chancellor’s mind. While Hollande could theoretically refuse to ratify the treaty, that would create a mega-crisis. As a strong pro-European, the socialist is unlikely to want that – especially since France has its own huge borrowing needs.

More likely, Hollande would seek to “complete” rather than “renegotiate” the pact by adding some wording about the importance of growth. There is a precedent. The stability pact in the original Maastricht Treaty was rechristened the Stability and Growth pact in 1997 after France’s incoming socialist prime minister, Lionel Jospin, kicked up a fuss.

Finally, consider Hollande’s war against bankers. His headline-grabbing promise – to separate “socially useful” finance from “speculative” activities – isn’t scaring French financiers. Partly this is because there is a global trend. The United States has the so-called Volcker Rule, which bans banks from proprietary trading. Britain has the even more extreme Vickers plan, which will force banks to put their retail operations into ring-fenced subsidiaries to protect them from infection by investment banking business.

The other reason French bankers aren’t too fussed is because the Hollande camp has been indicating that it prefers Volcker to Vickers. One only has to look at how long it is taking America to implement the Volcker rule to see how a French version could be diluted by the time it is implemented.

There is a risk that, caught in his campaign anti-capitalist rhetoric, Hollande might have no other choice than actually trying to implement some of these proposals to the letter. The more he insists that he wants “substantial” changes to the euro treaty, for example, the more difficult it will be for him to climb down once he is president.

Still, the problem is not so much what the presidential candidate is saying but what he isn’t saying. France has a generous welfare system that it has only been able to finance by racking up debts and imposing high taxes. Spending stood at 56.6 percent of GDP in 2011, 11 per cent more than in Germany, while taxes amounted to 50.8 percent of GDP, 6 percent more than its neighbour across the Rhine. The bloated state machine, where unions still rule, is resisting reform. Meanwhile, various rules and privileges prevent the labour market functioning efficiently or add to labour costs, notably the 35 hour week or the over-regulation of services. These high taxes and rigidities help explain why French annual growth averaged 0.6 percent less than Germany’s in the five years to 2011.

Other euro zone countries, such as Italy and Spain, are being forced by the crisis to reform. But France is not. Ten-year bond yields, at 2.9 percent, are admittedly 1.1 percentage points more than Germany’s, but that’s still a lot less than Italy’s and Spain’s levels of 4.8 percent and 5 percent respectively. To be fair, Sarkozy is now talking about supply-side measures such as cutting social security payroll taxes. But he wasted the opportunity to reform during the last five years and is unlikely to be given another chance. Hollande, meanwhile, isn’t even talking about such matters – and is keeping characteristically mum about how he will cut public spending.

This suggests two main scenarios for a Hollande presidency. One is that financial markets calm down, there is no reform and France wastes another five years. The other is that a new phase of the euro crisis erupts, forcing Hollande to embrace reform at last. But given his failure to prepare the French people for change, and their predilection for taking to the streets to protest at reductions in their privileges, this could be a rocky ride.


Email a friend

Please complete the form below.

Required fields *


(Separate multiple email addresses with commas)