Hollande’s choice

22.06.2012 - 09:35

After the Socialist Party’s (PS) commanding victory in the second round of France’s parliamentary elections, the question is, what are the next moves for President Hollande now that his hand has been strengthened?

The PS took a total of 314 of the 577 seats in a decisive voting swing that leaves the left dominant in parliament, and in the upper house after gains made in the senate elections last year.

So far, the recently elected French President’s socialist government have put forward proposals to increase the marginal rate of tax to 75% on incomes of over €1million, and will also impose an extra tax on company dividends, it

is also thought to have plans to raise taxes on employers.

In terms of any fresh national stimulus plans that the socialists may have in place, the conditions are hardly ripe to implement any further state sponsored growth programmes. Which may result in targeted fiscal policy response to the economy, in the same vein as has been suggested up to now.

Eurostat figures place the French national debt at the end of 2011 at 85.8% of GDP, a current deficit of 5.2%, leaving them in the worst half of indebted nations out of all of the EU countries.

While they may point to an inflation rate of 2%, 0.4 lower than the average of the Euro Area, and employment growth in a state of inertia at 0%, the EU average for first quarter of 2012 according to Eurostat, the sheer weight of the public debt alone may be enough to deter them from any major increase of government spending plans.

Francesco Saraceno, a senior economist for the Paris based Observatoire Français des Conjonctures Economiques,said: “I would say that there is not much room for manoeuvre for France as a individual country, the socialists must not be in denial about the situation in France and need to have spending constraints.”

However the election of Hollande can be a game changer in providing an alternative to the conservative austerity supported by the EU and Angela Merkel, the socialists can propose different policies.”

There should be no fears that President Hollande’s victory will result in a glut of spending plans, he has a history of being more a moderate socialist rather then being a member of the far left.

Despite his power in the French parliament whether he really will put forward a radical mandate remains to be fully seen, a spirit of compromise is thought to be in Hollande’s nature, but what is clear is that there is likely to be a increased tax burden on the upper class in comparison to the middle class.

What the socialists should do is follow a more free market path says Thomas Klau, head of the European Council of Foreign Relations’ Paris office.

The Socialist Party should be looking to create the conditions to improve competitiveness for French industry, to correct the obstacles in place now of having a regulatory environment that promotes entrepreneurialism.”

I don’t think its going to be a matter of national stimulus programme, but more of a European stimulus framework, this is highlighted by Hollande favouring Eurobonds that have been met with a lukewarm response by other parties.”

An intriguing fallout could result from the socialist victory in the European Union leaving an effect on the euro. This could come in particular from any future commitments to increase spending, that would defy the fiscal stability pact due to take effect in January 2013, that limit’s the eurozone countries to a 3% current deficit to GDP, which was implemented in the final weeks of the Sarkozy reign.

Germany’s ruling coalition has now agreed with its opposition to ratify the fiscal pact after several round of negotiations.

There is no doubt the opposition to the Angela Merkel style of austerity remedies for the economy could become a big shift in momentum in Brussels.” argued Francesco Saraceno.

The current policies are a disaster, although the continued opposition to them from countries such as Greece and Portugal are not credible. What is dangerous for the conservatives in Brussels is that Hollande’s position could become a magnet for more powerful players, leaving a coalition that could not be ignored in Germany.”

There is not a single country to blame for the situation, the problems are structural, some countries need austerity and others such as Germany that benefited from export led growth should increase their demand, for example improving wages with more public investment that will assist countries like Greece.”

After receiving 3.7% of the votes the far right National Front is celebrating victory winning two seats, of which one of them will be occupied by Marion Maréchal-Le Pen, the 22-year old niece of leader Marine Le Pen and granddaughter of party founder Jean-Marie Le Pen.

Although fears of a rise of the far right may be a little premature as the percentage of the votes they received is in a range that they have been previously used to, so cannot be viewed as a knee jerk reaction to the depressing economic situation resulting in turning to an extreme far right party.

Figures released from the French Ministry of the Interior from the parliamentary election reveal an apathy, as opposed to a frothing at the mouth opposition to mainstream parties, with a turnout of 46.42 %, just over 3% less than the corresponding election five years ago.

Thomas Klau concluded “Its is a success for them, but only a moderate one and does not really change the rules of the game, the parliament is in place for five years now and the National Front’s impact will be minimal.”