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Hollande Doubles Down to Impress Europe



With his third government reshuffle since taking office in 2012, President François Hollande of France has ditched the most prominent left-wing members of his cabinet and acknowledged that a "team of rivals" does not work for a weak president like himself. Facing record low approval ratings at home and skeptical European partners in Berlin, Frankfurt, and Brussels, the French president had little alternative but to double down on his recent political shift right toward a more mainstream European center-left social democracy for the French Socialists. Hollande is hoping that his commitment to austerity and reforms at a time when Europe is turning to a more activist fiscal policy earns him some appreciation from Germany and the European Central Bank (ECB).

Among Hollande's many headaches is that he inherited what is probably the most unreformed mainstream leftist party in Europe. Previous center-left modernizers like former Chancellor Gerhard Schröder of Germany and former Prime Minister Tony Blair of Britain benefited from several years of internal party reform before acceding to power. Hollande also lacks a sharp crisis to concentrate the party's mind. French leftists continue to adhere to the statist and public sector driven economic policies of the 1970s, while steadfastly opposing the liberalizing that France needs.

Beyond these problems, the French political system is an outdated relic preventing Hollande from undertaking reforms of the kind adopted in most other European countries to overcome intractable structural economic problems similar to those in France. Most of the older members of the European Union—including Germany, the Netherlands, Italy, Finland, Belgium, and Austria—are governed by a "grand coalition" of center-right and center-left parties. A grand coalition can be sclerotic. In Germany, the Christian Democratic Union (CDU) and Social Democrats (SDP) seem content to enjoy the economic spoils of earlier reforms in Germany. But such coalitions can also distribute responsibility for painful but necessary reforms, just as bipartisan majorities on occasion make reform possible in the United States.

France's imperial presidency makes such action nearly impossible, however. French politics are ultimately about winning the Elysee. Even if the center-right in France were healthy right now—a big "if" because the center-right Union for a Popular Movement (UMP) is leaderless and bankrupt—it would never join forces with Hollande's Socialist Party to enact economic reforms for fear of reducing its chance of regaining the presidency in 2017. Hollande must thus rely on his unruly left-wing coalition to make changes.

And the only political stick he can use to discipline his utopian left-wingers is the threat to dissolve parliament and hold new elections. French left-wing parliamentarians would perceive that threat as an idle one, knowing that an election would probably be lost by Hollande, costing him his parliamentary majority. In theory, a new center-right prime minister could share responsibility for France's economic overhaul in a new cohabitation with Hollande. More probable, however, is that the big winner would be Marine Le Pen's xenophobic National Front, leading to the center-right UMP tearing itself apart over who should lead it in 2017. All told, political chaos seems likely to result from de Gaulle's archaic political legacy. Even assuming that Hollande wins reelection in 2017, shared responsibility for such chaos is highly unlikely to be a successful political platform. Thus no one in the Socialist party would gain from early elections—and thus while Socialist parliamentarians may protest Hollande's new team, they are not likely to vote it down. Hollande must now act presidential and streamline his cabinet to implement centrist policies. His firing of well-known left-wingers like Arnaud Montebourg, the outspoken protectionist minister for industrial renewal, and former Education Minister Benoît Hamon was unavoidable, with Montebourg accusing Hollande of kowtowing to right-wing German economic orthodoxy.

Ironically, Hollande's purge comes just as the political consensus in the euro area is shifting away from austerity in the face of prolonged sluggish economic growth. At Jackson Hole, ECB president Mario Draghi said that "it would be helpful for the overall stance of policy if fiscal policy could play a greater role alongside monetary policy, and I believe there is scope for this, while taking into account our specific initial conditions and legal constraints." His comments shifted the ECB's emphasis, aligning it with the call by Jean-Claude Juncker, president-elect of the European Commission, for a €300 billion boost to EU public investments.

Having failed to undertake structural reform early in the crisis, Paris is now equally incapable of loosening fiscal policy. Fiscal multipliers are likely to be low in France. Private businesses remain on the sidelines, unwilling to invest and unconvinced that Holland can chart a path out of the economic wilderness. Hollande instead needs a government that can implement his earlier pledges for a supply-side "Responsibility Pact" to carry out labor market and many other needed reforms. He should also find €50 billion to finance his sensible reduction of payroll taxes. Doubling down on his reforms and firing left-wing opponents may help shift sentiment among French businesses and help convince his European partners that Hollande is serious.

If he succeeds, Draghi and Chancellor Angela Merkel of Germany may conclude that the risks of political moral hazard are manageable and that France deserves a quid pro quo. A reward for good behavior could take the form of easier ECB monetary policy, which would lower the euro exchange rate and help French exports, and German cash for a pan-European investment program.

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