A week after his January 14 announcement, it is not clear how and
when he will pull off the public spending and tax cuts at the heart
of the plan. It is also uncertain whether French business will play
ball with his goal of cutting unemployment.
Moreover, the new determination to cut taxes opens a whole new
Pandora's box: the question of whether Paris will bring its public
deficit into line with EU targets next year as promised.
"On the political front, Francois Hollande has pulled off a neat
exploit with his 'liberal shift'," said analyst Bruno Cavalier of
Paris-based Oddo Securities.
"On the minus side, uncertainty clouds the execution of this
Hollande's change of tack last week came after it became clear his
policies thus far were not working: major investment in
state-subsidized jobs was not bringing down unemployment, and the
public deficit was not falling as quickly as planned despite a
string of tax hikes.
In a major shift of emphasis to the supply side, Hollande
acknowledged the route to recovery lay in restoring French corporate
margins that are the lowest in the euro zone by handing them 30
billion euros of tax breaks by 2017.
Alongside was an announcement that existing plans to trim public
spending set to hit 57 percent of national output this year would be
accelerated with cuts set to total over 50 billion euros between
2015 and 2017.
Since then, his aides have raced to fill in the gaps. The bulk of
the tax breaks are to come from the conversion of tax credits
already announced, while the rest will be financed out of 5-10
billion euros in new savings from cutting expenditure. Taxes could
start falling as early as next year.
"We won't be able to do much then, but we have got to get the
momentum going," said one Hollande aide.
But if France decides on tax cuts as early as next year, that raises
the question of whether it will still be able to bring its deficit
down from 4.1 percent of output last year to under the three percent
threshold it promised for 2015, and then go on to achieve a
structural balance in 2017.
Finance Minister Pierre Moscovici told parliament on Wednesday the
2015 target would be met.
But the wager now mooted by some in Hollande's entourage is that a
slower pace of deficit-cutting will be accepted by France's EU
partners if it is clear that the tax cuts are being used to improve
the overall competitiveness of its economy.
"You must never give up hope of being able to convince people with
intelligent arguments," said the aide.
The exact pace of any fiscal easing will depend on how quickly
economic growth picks up from the sickly 0.9 percent forecast for
The bigger question is whether Hollande will pull off the promised
spending cuts at all, while making the cost of labor tangibly
Signalling an assault on the costly and complex system of local
French government — known as the "millefeuille" after a
multi-layered puff pastry — Hollande proposed slimming down the
number of regional and departmental authorities across France.
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While there is consensus the current system is unwieldy, any reform
cannot happen until after regional and cantonal elections set for
2015. Even then, the amount of savings it will produce is at best
"No one can predict what the savings will be for now," Minister of
Reform of State Marylise Lebranchu said. "What one department is no
longer doing, someone else will have to do."
What is more, if a local government shake-up entails putting public
servants out of work, that will act as a further drag on the economy
and push up an already bloated welfare bill, at least in the
Similar questions remain over talks with employers and unions which
Hollande kicked off on Tuesday and which he hopes will trade lower
and simpler corporate taxation for the rise in recruitment needed to
cut 11 percent unemployment.
"We are cautious about the pace of implementation, as these reforms
involve negotiations between various parties — social partners,
political parties, for example," Morgan Stanley's Olivier Bizimana
Already, verification of how companies will deliver on expectations
to increase hiring has emerged as a potential sticking point.
Employers group Medef has said sector-specific targets are
unworkable with Hollande insisting some measurable commitment must
be agreed in forthcoming negotiations.
Hollande's so-called "responsibility pact" is drawing comparisons
with the reform drive a decade ago by German Social Democrat
ex-Chancellor Gerhard Schroeder that is credited with turning round
the euro zone's biggest economy.
In Schroeder's case, the "alliance for jobs" of his first mandate
may have achieved patchy results. But it is now seen as setting the
stage for the more aggressive labor market reforms of his second
mandate under the "Agenda 2010" banner.
Hollande, already battling with record low ratings for a modern-day
French president, may not have the luxury of a second term. He also
has to deal with French industrial relations that are historically
testier than in Germany.
"I've never wanted to gloat over France," said a German official who
was closely involved in Schroeder's reform drive. "We know how
difficult the process is."
(Additional reporting by Emmanuel Jarry in Paris and Andreas Rinke
in Berlin; editing by Mike Peacock)
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