The new Socialist president of France will need to spell out several unpleasant truths to the electorate
François Hollande expects to inherit a worse public finances predicament than that declared by the Sarkozy administration and will promptly spell out several unpleasant truths to the French electorate, according to senior German officials.
Despite fears that he will pursue a “dangerous” economic policy featuring a return to Keynesian tax-and-spend practices, Hollande and his campaign team have told the Germans that this has been ruled out. “We can’t do Keynesianism twice in 10 years,” Michel Sapin, the former finance minister who wrote Hollande’s economic programme, told senior German diplomats, according to a confidential note obtained by the Guardian.
“Hollande is aware that right at the start of his term in office, he will have to spell out hard truths to the French,” says the eight-page memo from the German embassy in Paris to Angela Merkel’s office in Berlin. Hollande has vowed to launch his reform programme as soon as he takes office on 15 May, prioritising a rise in taxes for the wealthiest and curbing the state deficit.
The self-styled Mr Normal who has promised to scale down the trappings of the presidency, will begin with the symbolic measure of cutting his own presidential salary by 30%, and that of his ministers. He will immediately issue a series of decrees to ease the French electorate’s concerns about their finances, including a three-month freeze on fuel prices and a rise in allowances for parents.
Hollande must move fast if he is to capitalise on an election dynamic he hopes will give the socialists a majority in parliamentary elections on 10 and 17 June. He has conceded he will have “no state of grace” and little room for manoeuvre in France’s dire economic situation.
Economists, including those on the left, have warned of a dreadful “hangover” after the election results as the realities become clear in a country burdened with a spiralling public debt, where unemployment is at a record high, growth is stuttering, industry is in decline, competitiveness is low, there is a gaping hole in social security coffers and unions fear a swath of factory lay-offs after a lull during the campaign.
Hollande’s team have stressed that his cautious and pragmatic intentions are the reverse of François Mitterrand, the last socialist president’s early days in 1981 which saw an initial 18 months of high spending before being forced into a U-turn and austerity. Hollande’s team have predicted a difficult two years amid hopes of wealth redistribution at the end of the five-year term.
The markets are watching closely after France’s downgraded credit-rating this year. But French 10-year bond yields fell to 2.87% on Friday, not seen since early October, suggesting the market jitters forecast by the right were not in evidence. Hollande’s first legislation in an extraordinary parliament session n July will include a law on balancing the budget. He has promised to balance the books by 2017 and has said the budget deficit target of 3% of GDP for next year is sacrosanct. France has not balanced a budget in 30 years.
Hollande’s first international move was expected to be a telephone call to Merkel soon after the results were announced. He will immediately begin his push for pro-growth elements to be tacked on to the eurozone’s budget responsibility pact, which he hopes to press for at the end of June. His first European foreign trip will be to Berlin to meet Merkel.
Days after he officially takes office, he is to fly to the US to attend G8 meeting at Camp David and the Nato summit in Chicago, where he will announce that he wants France to withdraw its troops from Afghanistan a year earlier than stated, by the end of 2012. Privately, French foreign office and defence sources have said this deadline would be difficult to meet.
Key first moves in an extraordinary summer session of parliament will be to alter the French tax system, dismantling tax breaks for the rich and pushing up taxes for the wealthy. This is one of the cornerstones of Hollande’s manifesto, which he says would pump money into what he calls necessary spending on France’s under-performing schools.
He will also quickly write into law a 75% tax on annual income above one million euros. The right had warned this would spark an exodus of rich business leaders and footballing talent. “It’s a symbolic measure, an exceptional measure in exceptional times. I don’t think there will be a flight from France of brain power and capital,” said one leftwing banker who voted for Hollande.
Another immediate measure to crack down on fat cat pay will be the fixing of a maximum salary in public companies. The top-paid executives in state companies will be barred from making more than 20 times the lowest-paid employee’s salary. This would affect people such as Henri Proglio, chief executive of the French utility group EDF, who earned €1.6m last year. Hollande told Paris Match magazine last month that soon after taking office he would call a meeting with chief executives of the top listed groups and tell them: “We need you and you need the state.”
Even before the summer parliament session, Hollande is likely, by decree, to partially amend Sarkozy’s raising of the retirement age to 62. Hollande will restore the right of retirement to age 60 for people who started working at 18 and have paid their full dues. But his advisers told the Germans that the impact of this would be limited because only those with 42 years of pension contributions would be able eligible and most French do not enter the pension system until the age of 29.
Before August, he wants to sign off get banking reform, separating retail from speculation.
“If he wants to get reforms done he needs to move as fast as possible to take advantage of the few months the conservatives will be mired in infighting,” said an influential French business chief. “He’s basically got the summer to play with.”
The Hollande team stressed that fiscal and economic reforms would be based on supply-side changes, but that Hollande will also demand European “protectionist” measures on trade policy to try to reduce France’s €70bn external trade deficit, the German memo said.
“It is absolutely essential to generate growth but this can only be accomplished by supply-side measures and is no longer possible through state spending programmes,” the Hollande team told the German diplomats.
The new president wants to introduce a tax on financial transactions – a Tobin tax – but would not do so unilaterally, the diplomats reported. Hollande insisted that any revenue from the Tobin tax could not be used for deficit reduction, but only for investment purposes in the battle to restore France’s waning competitiveness.