Can the new French economic policy be successful?

Mathieu, Catherine; Sterdyniak, Henri Article Can the new French economic policy be successful? European Journal of Economics and Economic Policies: Intervention (EJEEP) Provided in Cooperation with: Edward Elgar Publishing Suggested Citation: Mathieu, Catherine; Sterdyniak, Henri (2013) : Can the new French economic policy be successful?, European Journal of Economics and Economic Policies: Intervention (EJEEP), ISSN 2052-7772, Edward Elgar Publishing, Cheltenham, Vol. 10, Iss. 2, pp. 175-192, https://doi.org/10.4337/ejeep.2013.02.03 This Version is available at: https://hdl.handle.net/10419/277267 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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Catherine Mathieu and Henri Sterdyniak Observatoire français des conjonctures économiques (OFCE), Paris, France In early 2013, the French economy, like many other EU economies, faces tough challenges. French GDP is 9 per cent below the level it would have reached had it continued to grow at its pre-crisis trend. France has committed to cut the public deficit to 3 per cent in 2013 and 0 per cent in 2017 which would imply dramatic public spending cuts and fiscal tightening, reducing GDP growth even further. France has to choose between strengthening its specificity, its social model and its State-interventionist tradition, and imitating the best pupils of globalization in the world or in Europe by implementing liberal or social-liberal strategies. The paper deals with the French government strategy since the 2012 presidential elections and tries to assess its chances of success. In many areas –fiscal strategy, social issues, banking and industrial policies –there is a significant risk that the announced proactive strategy will be replaced by policies accepting the constraints imposed by European institutions and financial markets. Keywords: French economic policy, fiscal compact JEL codes: E65, H60 1 INTRODUCTION In early 2013, the French economy, like many other EU economies, faces four main challenges. French GDP is still below its pre-financial crisis level and 9 per cent below the level it would have reached had GDP continued to grow at its pre-crisis trend. Between the first quarter of 2011 and the first quarter of 2013, GDP growth was almost flat. The unemployment rate has been above 10 per cent since the beginning of 2013 and has kept rising, with no sign of reversal. The fall in output has led the public deficit to reach 5.2 per cent of GDP in 2011. Under the pressure of financial markets and EU authorities, France has committed to cut this deficit to 4.5 per cent of GDP in 2012 and to 3 per cent in 2013. This would imply a fiscal tightening of around 1.6 per cent of GDP in 2012 and 2.5 per cent of GDP in 2013. But such a tightening reduces GDP growth. The question is: How to escape from this spiral? France suffers from problems in the manufacturing sector. The French current account turned from a surplus of 2.6 per cent of GDP in 1997 to a deficit of 1 per cent of GDP in 2007, and of 2 per cent of GDP in 2012. From 1997 to 2012, French market shares in world exports fell from 5.3 per cent to 3.3 per cent (−38 per cent), in parallel with the experience of Italy and the UK, while German market shares declined only moderately (−7 per cent). The central questions now are: How to restore the French productive structure? Is there a need for a ‘competitiveness shock’to organize substantial transfers from households to companies? European Journal of Economics and Economic Policies: Intervention, Vol. 10 No. 2, 2013, pp. 175–192 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd The Lypiatts, 15 Lansdown Road, Cheltenham, Glos GL50 2JA, UK and The William Pratt House, 9 Dewey Court, Northampton MA 01060-3815, USA France has to choose between strengthening its specificity, its social model and its State-interventionist tradition, and imitating the best pupils of globalization in the world or in Europe by implementing liberal or social-liberal strategies. Yet, Europe suffers from low growth and is unable to exit from the crisis. Trade and financial globalization have initiated the 2007 financial crisis. Should France jump onto a train which is about to derail? In May 2012, François Hollande, the socialist candidate, was elected President of the French Republic, and a coalition of socialists and greens won the legislative elections soon afterwards. This paper describes the strategy of the French government since these elections and tries to assess its chances of success. It shows that in many areas, there is a significant risk that the announced proactive strategy will be replaced by accepting the constraints imposed by the European institutions and financial markets. 2 THE EUROPEAN STRATEGY The current state of EU economic governance is such that each Member State (MS) economic policy is constrained by European commitments which impose fiscal consolidation and liberal reforms. What policy measures may then a government elected on a social-democratic programme implement? François Hollande wrote in his presidential manifesto in January 2012: 1 ‘Iwant to reorient European construction. I will offer our partners a pact of responsibility, governance and growth in order to exit the crisis and the austerity spiral which aggravates it. I will renegotiate the EU Treaty, through favouring growth and employment, reorienting the ECB’s role towards that direction’. In June 2012, François Hollande faced a major dilemma: signing the Fiscal compact meant accepting the liberal stance of the EU strategy; not signing the Fiscal compact meant opening a crisis in the EU. 2.1 The fiscal compact 2 The fiscal compact (the Treaty on Stability, Coordination and Governance) strengthens the Stability and Growth Pact (SGP), although the latter was a failure. The fiscal compact is one more step forward both from liberal proponents against Keynesian economic policies, and from EU authorities against autonomous domestic fiscal policies. The Treaty aims at making the dream of the liberals come true: totally paralysing fiscal policies; imposing public budgets in balance at any cost. According to the Treaty, budgets should be run in balance in structural terms, which has no economic justification. The true ‘golden rule of public finances’ 3 allows 1. Proposal No 11 in François Hollande’s manifesto, Le Changement c’est Maintenant - Mes 60 Engagements pour la France, January 2012: ‘Je veux réorienter la construction européenne. Je proposerai à nos partenaires un pacte de responsabilité, de gouvernance et de croissance pour sortir de la crise et de la spirale d’austérité qui l’aggrave. Je renégocierai le traité européen issu de l’accord du 9 décembre 2011 en privilégiant la croissance et l’emploi, et en réorientant le rôle de la Banque centrale européenne dans cette direction.’ 2. See also Bird/Mandilaras (2012) or Mathieu/Sterdyniak (2013). 3. This rule was developed at the end of the nineteenth century by Von Stein (1885), Leroy- Beaulieu (1891) and Jèze/Boucard (1896). It can also be found for instance in Musgrave (1939) or Eisner (1989). 176 European Journal of Economics and Economic Policies: Intervention, Vol. 10 No. 2 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd governments to borrow to finance public investment. Besides, households, insurance companies and financial institutions wish to own a safe financial asset, like public debt, and consequently, a structural public deficit is required. Fiscal policy should aim at maintaining a satisfactory demand level, inducing the highest employment level consistent with stable inflation and an interest rate equal to the nominal growth rate: there is no evidence that the corresponding level of public deficit is nil. Since euro area MS do not control their interest rates and their exchange rate, they need degrees of freedom in terms of fiscal policies. The Treaty imposes a rapid convergence towards the balanced budget in structural terms according to a trajectory to be set by the Commission without accounting for cyclical conditions. An automatic mechanism should be introduced to correct deviations from this trajectory. Temporary deviations should be allowed if they result from ‘exceptional circumstances’or ‘from a negative growth rate or from the accumulated loss of output during a protracted period of very low growth relative to potential growth’, but corrective measures should be rapidly implemented. In fact the Commission refuses to recognize that euro area countries have been in such a situation since 2009 and insists on requesting rapid cuts in deficits. The Treaty relies on the structural deficit concept. But its measurement is problematic, especially after strong macroeconomic shocks. 4 In fact, the Treaty specifies that the Commission’s estimates will have to be used. But they have two drawbacks. First, the Commission’s potential output estimates are always close to observed output, because they consider as structural the reduction of the capital stock resulting from a fall in investment during the crisis, like a large part of the decline in potential labour force (due to unemployed people’s discouragement), of the fall in productivity, and the rise in the unemployment rate: thus they underestimate the cyclical element of the deficit and will hence impose pro-cyclical policies. Second, these estimates are strongly revised over time. For instance, potential output estimates for 2006 were revised substantially downwards in 2008. MS will have to introduce independent institutions in charge of verifying that the balanced budget rule and the convergence to the trajectory path are met. This is one more step towards full technocratic management of fiscal policy. 5 A country under an Excessive Deficit Procedure (EDP) will have to submit its budgets and its structural reform programmes to the Commission and the Council, who will keep their implementation under surveillance. This article is a new weapon to impose automatic fiscal consolidation and liberal reforms. The Commission’s proposals will be adopted automatically unless there is a qualified majority against them, the country concerned not voting. Thus, in practice, the Commission will always have the last word. The Treaty is based on an implicit but incorrect theory: automatic stabilizers should play, but discretionary fiscal policies to support activity should be prohibited. But such policies are needed to support full-employment (Lerner 1943 or Mathieu/Sterdyniak 2013). The fiscal pact aims at preventing any autonomous national fiscal policies. Fiscal policies should become automatic and aim at balancing budgets, just like monetary policy should aim at fighting inflation; growth and employment should be sought by liberal structural reforms. 4. See the method in D’Auria et al. (2010) and critical assessments in Mathieu/Sterdyniak (2011) or Truger/Will (2013). 5. On Independent Fiscal Committee, see Wyplosz (2002; 2011), Fatás (2003), Calmfors/ Wren-Lewis (2011) and Mathieu/Sterdyniak (2013). Can the new French economic policy be successful? 177 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd According to the Treaty, each country should run restrictive measures without accounting for its economic situation and for other MS policies. The Treaty assumes implicitly that restrictive policies have no impact on GDP. If we consider the situation in 2012, this implies that most countries run austerity policies even if their public deficits result from insufficient output levels following the burst of the financial bubble and not from structurally excessive spending. 2.2 The growth pact In June 2012, France did not obtain any renegotiation of the Treaty, and merely obtained that the European Council adopted a Compact for Growth and Jobs. In spite of this title, it is not symmetric with the Fiscal Compact. It embeds no explicit target in terms of jobs or growth. It mostly includes already undergoing plans, some of them being of liberal inspiration: the Europe 2020 strategy, the need to guarantee the sustainability of pension systems, the improvement of the quality of public expenditure, the promotion of labour mobility, the fostering of competition in the areas of services, energy and public services. Growth-friendly measures are rather limited. An amount of €120 billion is mentioned (1 per cent of euro area GDP), but these measures apply over an undefined time period, and at a time when austerity programmes amount to €240 billion per year. Moreover, the impact of the promised €120 billion is questionable: €60 billion of it is supposed to come through an increase in the European Investment Bank’s lending capacity thanks to a €10 billion increase in capital; €5 billion is supposed to be created by issuing Project bonds to finance infrastructure projects, and €55 billion will consist of already budgeted structural funds being re-allocated towards ‘measures targeted to support growth’. The French government pretends to have obtained a major change in EU policies. In fact, the Compact for Growth and Jobs has not been integrated into the European major policies. The European Council decision from January 2013 to cut the European budget over the coming years marks the end of any hope of an active fiscal policy at the European level. In fact, the French government ratified the Fiscal Pact to avoid creating a political crisis in Europe, fearing that this would block any progress towards financial solidarity and economic coordination in Europe and that it would lead to a new wave of financial market speculation which could force several southern countries to leave the euro. But the Fiscal Compact implies abandoning fiscal policy autonomy while EU policies will remain dominated by economic policies orthodoxy, and accepting a long fiscal restrictive period. 2.3 The organic law The French government has chosen an ad minima reading of the Treaty, since the new fiscal procedure is not included in the Constitution, but only in an organic law. 6 This law sets up a High Council of Public Finance, which will give its advice on macroeconomic forecasts underlying the budget laws. It will assess whether the budget is consistent with EU commitments and with the budget programming law. It will give its opinion on the existence of ‘exceptional circumstances’. 6. In France, an organic law is intermediate between the Constitution and an ordinary law. It deals with government organization and rules. It must be agreed by the Constitutional Council. It requires an absolute majority in the Assembly. 178 European Journal of Economics and Economic Policies: Intervention, Vol. 10 No. 2 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd One may wonder what will be the degrees of freedom of the High Council. One may fear that the Council will not dare to conclude that the adjustment path is too restrictive or that the medium-term objective is not realistic. In the event of an economic slowdown, the Council will have to choose between promoting an expansionary policy to support growth and claiming for austerity measures to restore public finances. The High Council is chaired by the President of France’s Court of Audit (Cour des comptes), and consists of five members from the Court of Audit, the INSEE’s Director, and five members appointed by the President of the National Assembly, the President of the Senate, the Presidents of the Finance commissions of the National Assembly and of the Senate, and the President of the Environmental, Economic and Social Council. The predominance of the Court of Audit in the Council is problematic. Its judicial officers are submitted to the hierarchical authority of their president; they are not macroeconomic experts, and are more concerned with public finance balance than with growth and employment. Among the 11 members of the Council, 8 will automatically be in favour of consolidation policies. Article 21 of the organic law states that the Council’s deliberations will be confidential and that no minority view will be expressed in its reports. Fiscal policy choices must be subject to democratic procedures. The assessment of economic policy belongs to scientific and democratic debates. It should not be entrusted to a High Council, consisting mainly of judicial experts, rather than economists on the one hand and representatives of the nation on the other. The High Council will only give advice, which neither the government nor the parliament are obliged to follow, but there is a high risk that this advice will affect financial markets’and the European Commission’s assessments and that it would be risky for the government to ignore it. A left-wing government should not have accepted handing over the conduct of the French fiscal policy to a technocratic-led authority, instead of an elected Parliament. 3 THE ONE-EYED MACROECONOMIC STRATEGY In the presidential campaign, François Hollande announced that France would fulfil its commitment to bring the deficit down to 3 per cent of GDP in 2013 and to equilibrium in 2017 (Table 1). Thus he accepted the most arguable elements of the Pact –that is, a medium-term budgetary position in balance, and a trajectory of public balances independent of economic developments. Its programme implies a highly negative fiscal impulse in 2013 (−1.6 per cent of GDP) in order to reach the 3 per cent target; the fiscal impulse will remain negative afterwards, by around 0.6 per cent per year. François Hollande’s programme differs from the right wing party’s programme as strong increases in taxation are planned in the short term (2 per cent of GDP from mid 2012 to 2013); but it relies also on low public spending growth in the medium term. This raises three issues: 1. It is debatable that a left-wing government durably exert downward pressure on public spending, knowing the needs for social (pensions, health, family, education) and economic (companies’support, public investment) spending. 2. The programme abandons the objective of filling the gap between current and pre-crisis trend output. Under the assumption that the output gap was close to −9 per cent of GDP in 2012, it would still be close to −7 per cent in 2017. Can the new French economic policy be successful? 179 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd 3. The macroeconomic consistency of the programme depends on the size of the fiscal multiplier. Let us assume that the multiplier equals 1 for a strictly French fiscal policy measure and 1.33 for a measure applied to the euro area. François Hollande’s programme assumes implicitly that, in the absence of restrictive fiscal measures, GDP would have grown by 3.3 per cent in 2013, and by 2.85 per cent from 2014 to 2017 (Table 1, last three lines). The programme abandons hopes of a growth rebound. It accepts that French GDP loses 4 per cent in 2017 in order to bring public finances into balance, while a public deficit of 2.2 per cent of GDP in 2017 would have been consistent with the true ‘golden rule for public finances’ and with public debt stabilization. Let us consider the issue from another perspective: let us assume that France expects GDP to rise by 3 per cent in 2013, under neutral fiscal policies in the EU. The French public deficit will fall from 4.5 per cent to 4 per cent of GDP. In fact, the constraint is to bring the public deficit to 3 per cent. France should therefore implement restrictive policies amounting to 1 per cent of GDP. Since all euro area countries will do the same, the GDP growth forecast will be revised downwards to 1.7 per cent and the deficit will reach 3.67 per cent of GDP. There will therefore be a need for additional austerity measures of 0.67 per cent of GDP, etc. In the end, the successive austerity measures will result in a 3 percentage of GDP fiscal effort and a contraction of GDP of about 1 per cent. 3.1 The 2013 budget In September 2012, the LPFP (Loi de Programmation des Finances Publiques) embeds slower growth in 2012–2013: the output gap estimate has been reduced to −1.1 per cent in 2012. The potential output growth estimate is 1.3 per cent only for 2012 and 1.6 per cent for the following years. The government has resigned itself to a slow growth path. In the 2013 budget, the fiscal impulse is negative, by −2 per cent of GDP for 2013, of which 0.5 of a percentage point comes from expenditure cuts and 1.5 percentage Table 1 Macroeconomic prospects in François Hollande’s programme 2011 2012 2013 2014 2015 2016 2017 GDP growth** 1.7 0.5 1.7 2.25 2.25 2.25 2.25 Government balance* −5.2 −4.5 −3.0 −2.3 −1.6 −0.8 0.0 Interest payments* 2.7 2.8 2.8 2.9 3.0 3.0 3.0 Public expenditure* 56.3 56.5 56.3 55.8 55.3 54.6 53.9 Primary expenditure** 0.7 1.3 1.1 1.1 0.9 0.9 Tax-to-GDP ratio* 43.7 45.1 46.5 46.6 46.8 46.8 46.9 Fiscal impulse* −1.5 −1.6 −0.6 −0.6 −0.6 −0.6 Neutral policy: fiscal impulse* 0 0 0 0 0 GDP** 3.3 2.85 2.85 2.85 2.85 Government balance* −3.8 −3.4 −3.0 −2.6 −2.2 Note: *As a percentage of GDP; **in %. Source: Hollande (2012: 40 fn2). 180 European Journal of Economics and Economic Policies: Intervention, Vol. 10 No. 2 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd points from higher revenues. The government bets on the assumption that increasing taxes on the wealthiest and on large companies will have a small impact on demand. The number of civil servants remains stable: the rise in public service employment in some areas (education, police, justice, employment) is offset by cuts in other sectors. The general increase in public wages ( point de la fonction publique) remains nil. Some public investment expenditure (in culture, defence and justice) are cancelled. All in all, public expenditure cuts will amount to €10 billion. A strict management of public spending is pursued, albeit preserving the main functions of the State. At the time of writing, in May 2013, the French economic outlook remains weak. GDP growth was nil in 2012, and, according to the OFCE or the European Commission, will be nil also in 2013. The public deficit will stand at around 3.7 per cent of GDP in 2013, clearly above 3 per cent, due to the low growth, which means that austerity policies will have to be pursued in 2014. In order to meet the balanced budget target in 2017, and with the commitment not to increase taxes any further, the government will have to cut public spending by €70 billion (6.5 per cent of current spending). The government seems ready to abandon its growth objectives, to reduce the support to French companies, to downsize the French social model, for an arbitrary goal of reaching a balanced public budget in structural terms. But the government estimates that it is tied by the European constraints and financial markets, and continues to run a restrictive fiscal policy albeit hoping (without saying it) that a softer fiscal stance will be agreed at the EU level. 4 A RIGOROUS TAXATION POLICY François Hollande (2012: 15) wrote: ‘I want to introduce a major tax reform. Each one’s contribution will be made fairer by a major reform merging in the future the income tax and the CSG. Capital incomes will be taxed like labour incomes’. A number of French economists and politicians advocate a major tax reform. But some advocate a strong reduction of the tax burden (which implies a corresponding decrease in public spending). Some propose to shift the social protection burden from companies to households, which is not possible without significantly lowering households’purchasing power and consumption? Others are in favour of a fairer distribution of the tax burden between labour and capital incomes, of increasing the degree of redistribution in the French tax-benefit system. But France already has one of the most redistributive systems, with relatively heavy taxes on the richest and on capital incomes. Some suggest a simplification of the French system, to abolish tax exemptions, to broaden the tax bases and to lower the tax rates. But they forget the incentive role of taxation. Many fiscal schemes, even complex, are justified for social fairness reasons, like the quotient familial 7 or for job creation incentives, such as social contributions exemptions on low wages. The French tax system has four characteristics as compared to its EU partners, and in particular with Germany (Table 2): France has two income taxes (IR, a progressive tax with many exemptions and complications, and CSG, a flat contribution upon all personal income), but their cumulated weight is relatively light, while property taxes are relatively heavy. Employers’social contributions are high; employee contributions are relatively low. The business tax (taxe professionnelle) is relatively heavy. 7. In the French income tax, the family income is split between each family member (a child counting for 0.5) before being submitted to the tax schedule. Can the new French economic policy be successful? 181 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd Capital taxation is relatively high, while consumption taxation is rather low. Of course, there is no reason why French taxation should be brought in line with taxation in other EU countries. It is normal to have high social contributions in a country where social insurance benefits are high. The high level of employers’contributions is partly offset by the level of net wages. However, these figures would suggest that France should increase the weight of its income tax and VAT, and should reduce employers’social contributions; 8 in other words, it should implement a strategy of competitive internal devaluation, which is problematic in the EU context. In 2012–2013, the government’s strategy is to move towards a fairer taxation, weighing more on large companies, on the financial system and wealthiest households, and abolishing some tax cuts that the conservative president Nicolas Sarkozy (and even Jacques Chirac) had implemented, in particular abolishing some tax exemptions. The government faces a difficult trade-off: increasing taxation on the wealthiest people and the largest companies is consistent with its aim of tax fairness; it may have a smaller impact on demand than taxation on the whole population, but, in an open economy, it introduces risks of losses of competitiveness and attractiveness and of tax optimization and tax evasion behaviours. Table 3 shows the measures taken by the government for 2012–2013, which amount to €32 billion per year (€11 billion on firms or banks, €11 billion on the richest households, €10 billion on all households). Concerning the business sector, the government has not introduced measures to reduce corporate taxation on SMEs or on reinvested profits, owing to public finance constraints and contrary to what François Hollande had announced. The corporate tax rate on large companies thus remains at 36 per cent, which is the highest level in Europe (the euro area average is 26 per cent). Table 2 Structure of taxation, in percentage of GDP in 2007 Germany France Total 37.3 42.4 Personal income 9.4 7.0 Corporate income 1.3 1.5 Employees’social contributions 6.3 4.1 Employers’social contributions 6.8 11.3 Others’social contributions 1.4 1.3 Wage taxes −1.3 VAT and other indirect taxes 11.1 10.6 Business tax* −1.5 Taxes on capital 0.9 3.4 Households’local tax 1.1 Households’property tax 0.2 0.7 Company property tax 0.3 0.6 Wealth tax −0.2 Inheritance/donation 0.2 0.4 Transactions 0.2 0.4 Source: OECD (2012). 8. This strategy is advocated in OECD (2013). 182 European Journal of Economics and Economic Policies: Intervention, Vol. 10 No. 2 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd in difficulty. The BPI is designed to finance innovative companies. The Minister wishes to re-value the label ‘made in France’, to make clear that France produces high quality and environmentally friendly products and to develop economic ‘patriotism’ by pushing households to buy French products. At the EU level, France would like the Competitiveness Council to evolve and implement an industrial policy, allowing public support to innovating firms or to threatened sectors, and a more protectionist trade policy. Thus the French strategy would involve the government in a substantial role. The government would guide industrial development towards green and innovative products and production techniques. It would decide on the sectors to be protected and the sectors to be developed. These sectors would receive support through taxation, specific aids (investment, innovation), and the BPI. The productive revival would be piloted by the ministry, the BPI, regions, social partners, and not only by firms’managers or owners. This strategy is hardly consistent with EU constraints and with the functioning of a capitalist system. It requires motivating workers in concerned companies, civil servants in its ministry, bankers in the BPI, politicians in the regions, and companies’ managers to impel a new growth model, which is not an easy task. 8.1 A competitiveness shock? In view of the deterioration of the French economic performance, many (among them the MEDEF, the employers’association, and also the CFDT, a reformist employees’trade union) advocate a competitiveness shock. The plan is to cut employers’contributions, and, as a counterpart, to increase households’taxation, via VAT or CSG. In February 2012, the former government had decided such a measure at a limited scale, cutting employers’contributions by €13 billion, financed by a rise in VAT (€11 billion) and a rise in taxes on households’capital gains (€2 billion). The measure was to be introduced by 1 October 2012. Following the Presidential elections, the new government abolished this measure when it came into power, but asked Louis Gallois, former head of EADS, who had expressed his opinion in favour of the competitiveness shock, to prepare a report on this topic (Gallois 2012). The ‘competitiveness shock’philosophy is that households accept a strong fall in purchasing power in order to improve companies’profitability or competitiveness. In fact, there is little difference between increasing CSG or VAT. However, a rise in VAT increases price inflation, and this automatically affects the minimum wage rate (SMIC), and social benefits, which are fully price-indexed and –after wage bargaining –other wages, which means that the gain in terms of companies’competitiveness and profitability may be short-lived. On the contrary, the victims of a rise in CSG would not benefit from indexation rules and would have to accept a lower purchasing power. The project raises five issues, were the current government to embark on it: 1. The government would have to request households to accept a fall in their incomes. This would be in contradiction to the decision to abolish the VAT increase which had been announced by the former government. 2. There are no companies’commitments, in terms of investment and jobs in France, in exchange for a measure that would substantially increase their profits. There is a risk that the companies would increase their dividends or investment abroad. 3. France is in an intermediate position between northern countries which have improved the competitiveness and profitability of their firms at the expense of Can the new French economic policy be successful? 189 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd domestic households’purchasing power, and southern countries where wage growth was excessive. It would be catastrophic for the euro area if France followed the German strategy: this would induce each MS to cut wages and social benefits with a view to improving domestic competitiveness leading domestic consumption – and thereafter GDP –to fall. 4. French companies’profit share in value added stood at 29.6 per cent in 1973. It fell to 23.1 per cent in 1982, and rebounded to 30.2 per cent in 1987. It stood at 30.8 per cent in 2006 –that is, at a satisfactory level. Since then the ratio has fallen, due to the fall in output and labour hoarding, which in principle is a temporary phenomenon. The fall was not caused by taxation or by excessive wage increases. The profit share in value added will not be restored with the introduction of measures leading consumption (and hence GDP) to decrease. 5. Using internal devaluation assumes that France suffers mainly from a pricecompetitiveness deficit. But, de-industrialization has other and deeper roots. Companies prefer to expand their activities in emerging countries, scientific education is not a first choice, the young refuse to start a career in manufacturing because job prospects appear to be too risky and wages are too low. France has succeeded neither in protecting its traditional industries, nor in developing innovating sectors. This would not be solved by internal devaluation. Despite these challenges, the government decided on November 2012 to take a first step towards a competitive real devaluation. From 2014, companies will benefit from a tax credit for competitiveness and employment (CICE) of €20 billion, calculated as 6 per cent of their wage bill for wages between 1 and 2.5 times the minimum wage. These €20 billion will be financed by €10 billion obtained by additional cuts in public expenditure; by €7 billion from a VAT rise and by €3 billion from an increase in ecological taxation in 2016. This tax credit is not subject to any condition, but companies will have to establish a report showing that these tax credits were used for investment, employment or R&D. These €20 billion amount to a mere 2.5 per cent cut in total wage costs; only one-third will benefit industry. One may fear that the government will more or less abandon any active interventionist industrial strategy to promote a liberal policy –that is, to increase firms’profit in praying that they will invest. 9 CONCLUSION François Hollande’s economic strategy is ambiguous. The French President was convinced that there is a need for a new policy in Europe that was more growth-targeted, but in order to avoid a political crisis in Europe, he accepted the Fiscal Pact which forces member states to run austerity policies. This imposes an absurd trajectory of public deficit cuts on France, which makes fiscal policy pro-cyclical. Public deficit reductions are expected to be obtained in the short term by higher taxation on the wealthiest and on large companies, but in the medium term by public and social spending cuts of 3 per cent of GDP. The European discourse on the need for structural reforms is neither clearly accepted nor clearly rejected. The government counts on social partners to reform labour markets, choosing the employers’viewpoint (higher flexibility) rather than the trade unions’one (preventing lay-offs). He wishes both to reassure financial markets and to reduce their influence (in particular through banking regulation and financial transaction taxation). François Hollande is in favour of a strict separation between retail and investment banks, and for an increasing role of the investment public bank (the BPI). But he 190 European Journal of Economics and Economic Policies: Intervention, Vol. 10 No. 2 © 2013 The Author Journal compilation © 2013 Edward Elgar Publishing Ltd accepts the European banking union, where France would lose all control of its banking system. The French banking law is very limited. The government wants to organize a ‘re-industrialization’of the French economy, through direct support by the government, regions and the BPI to industrial firms. But the resources allocated to this policy are limited. The BPI is under-funded. The government does not organize the social mobilization needed for a reform of corporate governance. Under the pressure of entrepreneurs’ organizations, the government undertook a ‘competitiveness shock’strategy, a decrease by €20 billion employers’social contributions financed by public expenditure cuts and VAT increases. The risk of this ambiguity is that the government will not convince firms’managers and entrepreneurs, after the tax rises in 2012–2013; it will not mobilize workers, disappointed by the lack of social measures, the continuation of austerity policies, the shyness of economic strategy and the continued rise in unemployment. In mid 2012, two scenarios could have been envisaged. The first was a ‘rupture scenario’, where France would try to find an original way, Colbertist, social-democrat and ecologist, based on public and social intervention, boosting growth, protecting the French social model and social cohesion, preparing for environmental transition. 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