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Fri September 14, 2012
Foreign Policy: Hollande On Defense
Eric Pape is a contributor at Foreign Policy.
La rentree — the time of the year that France's workers, students, and politicians come back from their summer holidays — is a time to take stock, and François Hollande returned from his first presidential vacation at a former fort on the French Riviera in a political free fall. Cascading approval ratings and a relentless media barrage suggesting that he is an absentee captain of an aimless ship in storm led to a strange spectacle: a president in power for barely 100 days went on France's most popular television show, live and in prime-time, and told his interviewer that, "The government hasn't wasted any time and it has acted rapidly." Historically, freshly elected French presidents — who, until 2002, enjoyed leisurely seven-year terms — have rarely felt the need to justify the pace of their activity, especially in their first months in power.
While it is clear that France's presidential metabolism has sped up in the 21st century, particularly during the hyperkinetic just-ended term of Nicolas Sarkozy, the main reason that Hollande needs to make such assurances now is a testament to the scale of the buzzkill France endured in August. After 15 consecutive months of rising unemployment, the nation crossed a grim psychological barrier: surpassing 3 million people on the dole. That's a rate of 10.2 percent unemployment. During the interview, Hollande announced that the government was lowering its anemic economic growth forecast for 2013 from 1.2 percent down to .8 percent. (Soon after, a separate survey of 18 economists resulted in an even lower forecast of just .3 percent for 2013.) Worse, the government forecast for growth this year is zero.
Meanwhile, the existential eurocrisis continues, with no decisive endpoint in sight. And it emerged in the French press on Sept. 8 that Bernard Arnault, who Forbes ranks as the 4th richest man on Earth with a net worth of around $41 billion, has applied for citizenship in Belgium. Arnault insists that France will remain his tax residence, but many people doubt this, given that Belgium is particularly welcoming to the wealthy, and that Hollande has promised to institute a "super-tax" on France's highest revenue earners. In the United States, some people who are rich (or who think they might one day get rich) might have heart attacks over Hollande's new super-tax that will gobble up 75 percent of an individual's annual income that is over 1 million euros ($1.28 million). And most of the first million will be taxed at a 45 percent rate.
If, after obtaining his Belgian citizenship, Arnault has a change of heart about where he wants to pay his taxes, the loss of revenue for the French state could be enormous. His taxes are private, as are his deductions, but he reportedly earns an eight-figure salary as the head of the luxury group LVMH, in addition to the return on his many investments. The question in places like London, Luxembourg, and Geneva is now: how many other rich tax refugees should they expect?
As political honeymoons go, Hollande's has been stunningly short. In May, 62 percent of the French showered approval on him. Barely three months later, that number dropped to 48 percent. And that has been in the absence of any sort of scandal. In the last month alone, he saw a drop of 9 percent in the percentage of French people who believe that he is capable of keeping his (still-popular) campaign pledges, from 57 percent down to 48 percent. Anxiety, meanwhile, has surged. In May, 34 percent of the French described themselves as "rather unsatisfied" (or worse) with Hollande. By early September, the disgruntled rate leapt to 59 percent.
In an effort to restore the faith that voters placed in him in the spring, Hollande insisted in the television interview that he has a clear vision for his presidential term, but that he will need time, patience, and called for the nation to come together in the face of an array of epic challenges. "I know where I am going. I say to the French: I am taking responsibility," he said.
"The current economic slowdown makes it even more difficult to achieve this objective," Hollande continued, "but it makes success even more crucial."
Specifically, he insisted that within a year France will "invert the curve" of rising unemployment; that meaningful economic growth will return in 2014; and that by 2017 France will — and this would be a small miracle — eliminate the last traces of its intractable annual budget deficit. The implicit message in these promises is that France faces a very challenging half-decade.
In the same interview, Hollande also offered a grim state-of-the-republic assessment in which he noted "high unemployment, decreased competitiveness, considerable deficits [and] an historic indebtedness." The message to his base: circumstances prevent him from acting like some sort of Socialist Santa Claus for France's poor and middle classes.
So what will he do? His vision to restore France involves a three-part plan to restore its finances. The government plans to increase taxes on the nation's wealthiest citizens by $12.8 billion, and on businesses by an additional $12.8 billion. On the other side of the ledger, Hollande pledged to reduce government spending by yet another $12.8 billion. Put simply, his deficit-reduction solution is two-parts tax increases on people with the money to pay them, and one-part spending cuts on those who receive benefits.
The reality, as any economist or anyone familiar with French politics knows, is that these suspiciously round figures — 10 billion euros in all three cases — will turn out to be rough guidelines rather than lines in the sand. It is the job of the government of his prime minister, Jean-Marc Ayrault, to translate Hollande's vision into actual policy.
This will require a great deal of skill in dealing with France's business leaders, workers, and the ruling party's own political base; Hollande, like leaders around Europe and the United States, is struggling with complex questions. How to regulate the economy without handicapping it? How to encourage hiring and reduce the cost of French labor without eliminating crucial benefits and downgrading the value of jobs? How to increase purchasing power without increasing the debt and empowering fickle lenders to decide his nation's fate? How much to tax the rich without spurring them to flee? Finding balance is unlikely to be easy.
On the tax-the-rich front, it remains to be seen whether or not Hollande's plan will spur Jaguar and BMW traffic jams of fleeing millionaires at the borders with Belgium, Luxembourg, and Switzerland, or if it will hurt French industry as CEOs move their companies abroad to preserve their own incomes. But given that Hollande's super-tax enjoyed the support of about seven in 10 voters, according to polls during the campaign, it is hardly a surprise that he is pushing forward. To reassure France's 1 percent, Hollande clarified that his millionaire's tax will just be a two-year measure. And, he insisted, it will only apply to between 2,000 and 3,000 individuals. (Other increases, such as an increased beer levy will affect a broader swath of the population.)
Hollande has also promised to facilitate the hiring of 100,000 young people in poor urban neighborhoods and rural areas in the next year. While the final details still need to be ironed out, it appears that the government will create a new contractual framework that allows for 1- to 3-year work contracts for people between 16 and 25, with the state subsidizing a substantial portion of those salaries. Other efforts to broaden access to job training and lower labor costs to make French workers more competitive internationally, are also being finalized.
But the Socialist president is banking, above all, on re-solidifying France's financial status. This means keeping promises to the European Union to lower the nation's public deficit to 3 percent or less of GDP by the end of next year (which should go over well in Germany.) After which he will further bolster France's status with its lenders by eliminating that deficit altogether by the end of his term. "It will be," Hollande said on television, "the most significant budgetary effort in 30 years" in France.
(He didn't mention that the deficit is expected to drop to 4.5 percent at the end of this year, thanks to reductions made by Sarkozy.)
Speaking slowly and firmly, Hollande told voters that he was never going to be able to do in four months what his predecessors, Sarkozy and Jacques Chirac, failed to do in the last decade. The speech may well stem Hollande's immediate decline, even if it remains to be seen whether the government can convincingly implement the president's vision. There are also the nagging questions of whether the change of leadership in Paris will really be able to untie France's Gordian knot, as Hollande suggests — and whether the increasingly grumpy French will give him the time he needs to try.
One thing is immediately clear, though. Hollande needs to transform into action the campaign slogan that helped to get him elected: "Change, it starts now."
After a rocky holiday season, it better.