Wednesday, 8 May 2013

Eurozone risks - France (2)

I referred in an earlier post to the inability and unwillingness of the current French government to confront the main issues France faces. And there's been a lot of comment, especially after last weekend's anti-Hollande protest demonstrations made them topical, about his government's lack of grip and the President's own consequent poor standing in the polls.

It's certainly true that many current French economic policies are either wrong-headed or inadequate. Examples are Hollande's campaign pledges to hire 60,000 more teachers when the fiscal deficit is already too high, and to wind back the one headline reform his predecessor, Nicolas Sarkozy, had managed to implement  (raising the age of eligibility for superannuation to 62).

What's striking in particular is how out of date some of them are. 75% top income tax rates, one of President Hollande's cunning plans, take us all the way back to the counterproductive policies of 50 years ago. Remember when the Beatles wrote 'Mister Taxman'? - "Let me tell you how it will be, There's one for you, nineteen for me...Should five percent appear too small, Be thankful I don't take it all". Is 75% way above any kind of optimal tax rate? Is it likely to produce a flight of the most talented, internationally mobile, and most productive? Is the flight already happening? Will the policy result in a lower rather than a higher tax take? Could all of this have been predicted? Respectively, yes, yes, yes, probably, and yes.

Perhaps it's because France's Socialists rarely command all the levers of power, and when they do eventually get hold of them (as they do today at all national and virtually all regional levels), they take over with the policies in vogue when they last held sway. Whatever the reason, their policies often tend to be decades behind the times. I'm reminded that, just as the Western world was about to embark on a massive privatisation programme, the French government under President Mitterrand moved to nationalise the French banks in 1981 (prompting, by the way, banker Baron Guy de Rothschild's mordant comment, ""A Jew under Pétain, a pariah under Mitterrand. For me, it's enough. To rebuild on ruins twice in a lifetime is too much").

All that said, I wouldn't be entirely sure that Hollande is as inept as the commentariat and the latest polls would make out. Hollande is intellectually smart (an énarque, a graduate of the prestigious Ecole Nationale d'Administration), politically astute (he manoeuvred through the fratricidal currents of the Socialist Party for decades), and electorally lucky: first, the front runner for the Socialist presidential nomination, Dominique Strauss-Kahn, imploded spectacularly, and second, Hollande benefitted from the "anyone but Sarkozy" vote. He didn't have much to spare - he got 51.7% of the final run-off vote - but he knocked off a sitting President, no mean feat.

There are also some recent signs of more rational economic policy - a warmer approach to business, revisions to an ill-judged capital gains tax proposal, some changes to labour laws - and, for me, one good sign in the appointment of Jean Pisani-Ferry, previously the director of the highly regarded Bruegel think-tank, as director of the French Prime Minister's Economic Policy Planning staff. You can get a flavour of what Pisani-Ferry is likely to be advising, as well as a very good analysis of the Eurozone's issues, here.

The policy outlook, in sum, is very much in the balance right now. The Eurozone's second largest economy could be starting to move to more conventional, effective management, or it might drift on in the muddle-headed way of the past year. I'll update with any developments that indicate which path looks the more likely.

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