* Valls hands in government's resignation after internal
* Montebourg says he and other leftists will not seek new
* Crucial moment for future reforms, 2015 budget
(Adds lawmaker comment)
By Ingrid Melander and Alexandria Sage
PARIS, Aug 25 French President Francois Hollande
on Monday called for a cabinet reshuffle, evicting from his
government rebel leftist ministers who had argued for an
economic policy U-turn away from budgetary rigour.
The surprise move - which risks deepening the confrontation
between Hollande and more left-wing lawmakers - came a day after
outspoken Economy Minister Arnaud Montebourg attacked euro zone
powerhouse Germany for ruining the region's economy with what he
called an "obsession" with economic austerity.
Montebourg did not wait for Prime Minister Manuel Valls to
announce a new cabinet, which he is scheduled to do on Tuesday,
before stepping up his attacks and declaring he and two other
left-wing ministers would not seek roles in it.
"The whole world is begging us to put an end to these absurd
austerity policies which are burying the euro zone deeper and
deeper in recession and which will soon end up with deflation,"
he told a news conference at the French finance ministry.
"We must have the intellectual and political courage to
acknowledge that austerity policies are making deficits worse
instead of narrowing them," Montebourg said before walking out
of the room to the applause of his staff.
It will be the second change of government by the unpopular
Hollande in as many years in office and comes barely five months
after a first reshuffle intended to promote a more pro-business
line. Critics called for new elections and the newspaper Le
Monde titled its editorial "The Last Chance of the President".
The fate of Montebourg, who has long argued that
deficit-cutting should not be a priority with stagnant French
growth and unemployment stuck at over 10 percent, had been
sealed early in the day with a terse statement from Hollande's
NEW CABINET ON TUESDAY
"The head of state asked (Prime Minister Manuel Valls) to
form a team that supports the objectives he has set out for the
country," said the statement issued after Valls presented his
government's resignation to the president.
Hollande's objectives are to revive the euro zone's second-
largest economy with tax cuts while slowly reining in its public
deficit by trimming spending.
France has lagged other euro zone economies in emerging from
a recent slowdown, fuelling frustration over Hollande's
leadership, both within his Socialist party and further afield.
Montebourg said fellow left-wingers Benoit Hamon and Aurelie
Filipetti, who hold the education and culture portfolios
respectively, were also stepping down. Filipetti separately
signalled she did not want a post in the new government.
Hollande's decision to part company with Montebourg, viewed
as a potential presidential rival, raises the risk that the
ousted minister could take with him enough rebel lawmakers to
deprive the president of the parliamentary majority he needs to
While Montebourg told TF1 television that he still backs the
government, self-proclaimed rebel Socialist lawmakers said
nothing was excluded and announced they would step up efforts to
change the government's economic policies.
"There is an interesting convergence" of views with
Montebourg, one of the leading rebel lawmakers, Laurent Baumel,
told BFM television, calling Montebourg's eviction a mistake
that would shrink support for the government.
Opposition conservatives, who for weeks have been embroiled
in their own leadership rows, called for an outright dissolution
of parliament, as did the far-right National Front.
"With half of the presidential mandate already gone, it
doesn't bode well for the ability of the president, or whatever
government he chooses, to take key decisions," said former Prime
Minister Francois Fillon, one of handful of hopefuls for the
conservative ticket in the 2017 presidential election.
"The big question with this reshuffle is whether Francois
Hollande will still have a parliamentary majority," Frederic
Dabi of pollster Ifop told i>Tele.
In a confidence vote in April, Valls' government scored 306
votes - above the 289 votes needed for an absolute majority -
with the help of smaller allied parties.
The first test will be the 2015 budget, with a draft bill
due to be presented next month and voted by end-December.
A new survey released at the weekend showed Hollande's poll
ratings stuck at 17 percent, the lowest for any leader of France
since its Fifth Republic was formed in 1958. Valls, a
once-popular interior minister, saw his own popularity eroded by
his failure to tackle unemployment, which is above 10 percent.
Hollande has sought to repair ties with German Chancellor
Angela Merkel's conservatives that have been strained by
France's repeated failures to meet budgetary targets agreed with
the Brussels-based European Commission.
Speaking at a meeting of Socialists in eastern France on
Sunday, Montebourg said deficit-reduction measures carried out
since the 2008 financial crisis had crippled euro zone economies
and urged governments to change course swiftly or lose their
voters to populist and extremist parties.
The irony of the timing of Montebourg's comments is that EU
policymakers have in recent weeks acknowledged the bloc's rules
on budget consolidation should be followed with flexibility,
while France this month conceded that stagnant growth meant it
would miss its 2014 budget target.
ECB chief Mario Draghi last week eased the focus of his euro
zone policy away from austerity towards reviving growth, urging
governments in a speech to do more to boost demand and hinting
at European Central Bank action.
Germany, France, Italy, Spain, Portugal, Ireland and others
saw their bond yields hit all-time lows on Monday in response to
his remarks, as speculation grew the ECB was preparing new asset
purchases to counter wilting inflation.
(Additional reporting by Maya Nikolaeva, John Irish and Julien
Ponthus; Writing by Mark John; Editing by Larry King)