Analysis: Hollande's growth goal gutted by deficit plans

PARIS Mon Sep 10, 2012 11:07am EDT

1 of 2. France's President Francois Hollande poses after an interview during the evening broadcast news of French TV channel TF1 in Boulogne-Billancourt, near Paris September 9, 2012.

Credit: Reuters/Kenzo Tribouillard

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PARIS (Reuters) - French President Francois Hollande has set himself a deadline to turn around the economy by the end of 2014, but having hamstrung the effort with tax rises to meet deficit targets, economists doubt his growth goals will ever fly.

Hollande in "battle mode" pledged to the nation on Sunday to reverse a relentless rise in unemployment and return the stalled economy to growth in two years, but a government spending freeze and looming tax rises in 2013 could stifle growth, much as they have elsewhere in Europe where deficit-cutting measures have been tried.

The Socialist leader also promised labor market reform next year, whether or not unions are on board, intended to boost job protection for employees and give firms more hiring flexibility, two more goals usually at odds.

If he hopes to boost his approval rating with voters, which has drifted down to 44 percent just four months into his term, he will find economists a much tougher nut to crack.

"The acid test is the return to growth, and I don't see that happening," said George Magnus, senior economic advisor at UBS.

"If his principal message is: 'We're on course to get over this mess in the next two years', then I think that's a delusion. It's completely unrealistic. We do not have a credible plan that gives people confidence a return to growth is likely."

Despite market views that French growth will only recover to around 0.5 percent next year, most analysts think Hollande will be able to cut the deficit to within half a percentage point of a 3 percent of gross domestic product target as he targets 10 billion euros ($12.8 billion) from freezing spending and 20 billion in raised taxes on employees and companies.

What they cannot see is how a policy of hiking taxes squares with his pledge to fire up growth, especially given the lack of detail on what labor reform next year aimed at bolstering industrial competitiveness could entail.

"I think they're serious on plugging the deficit. It's more on structural issues that I fail to see how the equation solves," said senior Deutsche Bank economist Gilles Moec.

"By skewing the effort towards business, because they want to protect workers, they're going to worsen the financial position of the business sector, and this is where I see a contradiction in their strategy."

ECONOMISTS WANT DETAILS

Hollande's immediate challenge is to produce a budget at the end of this month that must lay out at least 30 billion euros in savings, despite scaling back his 2013 growth expectations to around 0.8 percent from 1.2 percent previously.

France's state auditor has calculated that the government would need to find 33 billion euros in savings if 2013 growth is 1 percent and 38.5 billion if growth is 0.5 percent.

Flat growth next year, as predicted by the most pessimistic analysts, would require 44 billion euros in savings to cut the deficit to 3 percent of GDP from 4.5 percent at the end of 2012.

With many foreign investors nervous that relatively low bond yields do not accurately reflect the strains in the French economy, Hollande must prove his deficit-cutting mettle to avoid France being dragged deeper into the euro zone crisis.

By basing the budget on an optimistic growth outlook and loading more taxes on the wealthy and businesses, he has disappointed those hoping he might attack a dizzy public spending ratio of 56 percent of economic output.

Beyond state spending, outsiders are still trying to figure out whether Hollande has what it takes to enforce reforms to make hiring and firing more flexible, lower the cost of labor and reduce a competitive disadvantage among French firms competing with German and Chinese industry.

Hollande's promise to set reform in motion by the start of next year, even if unions are not on board, sounded bold, but he has still not spelled out exactly what he plans to do.

While one trade union, the CFDT, is showing more flexibility on the idea of making long-term work contracts less binding but putting more employees on them, most unions still firmly oppose making it any easier for firms to lay off workers.

Hollande's advisors have consistently hinted that he will try to work with unions to nudge through the kind of reforms that have strengthened German industry but that past French governments have baulked at.

Yet until he states specifically what he plans to do with either the labor market or the bloated welfare state, economists say they are skeptical.

"The Greeks, Irish and Portuguese have been 'troika-ed' into making changes, but elsewhere I don't sense Europeans have acknowledged the need for more extensive reform," said Magnus, referring to the troika of inspectors from the European Central Bank, the Commission and the International Monetary Fund that oversees aid plans in peripheral euro zone states.

"Hollande is responding to a political problem (of weak ratings), but these economic pledges for the next two years don't cut much ice with me. They still have it all to do, and we need to see the bones underneath the flesh."

Hollande may be hoping that convincing the nation he has the economy in hand could bolster consumer and business confidence, which will be key for a recovery from two flat first quarters.

On Monday the Bank of France forecast gross domestic product would fall 0.1 percent in the third quarter.

Staking his credibility on a defined target cost Hollande's predecessor Nicolas Sarkozy dearly. He lost the May election in large part because he failed to deliver a 2007 campaign promise to end the scourge of high unemployment.

(Reporting By Catherine Bremer; Editing by Will Waterman)

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Comments (3)
ben.hed wrote:
President Francois Hollande policy looks like a recipe for disaster. No country has ever been able to tax itself to prosperity. The French people do not get it, that socialism does not work for creating prosperity.

Sep 10, 2012 8:30pm EDT  --  Report as abuse
ben.hed wrote:
President Francois Hollande policy looks like a recipe for disaster. No country has ever been able to tax itself to prosperity. The French people do not get it, that socialism does not work for creating prosperity.

Sep 10, 2012 8:30pm EDT  --  Report as abuse
ben.hed wrote:
President Francois Hollande policy looks like a recipe for disaster. No country has ever been able to tax itself to prosperity. The French people do not get it, that socialism does not work for creating prosperity.

Sep 10, 2012 8:30pm EDT  --  Report as abuse
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