(Swans - June 4, 2012) "Change is now" was the slogan used by the candidate François Hollande during the French presidential campaign. Since he defeated Nicolas Sarkozy and took office on May 15, 2012, Mr. Hollande has emphasized his simplicity and normalcy in contrast to the Sarkozy era. He chose as his prime minister another quiet man, Jean-Marc Ayrault, who selected 16 women and 16 men for his government, a parity that had never been achieved in the history of the republic. They went to work in a hurry, though they have to wait until June 17 to find out whether their party will get an absolute majority in parliament in order to implement their ambitious program. So they have proceeded cautiously, talked a lot, and taken a couple of symbolic actions.
Mr. Hollande, in the evening of his investiture, flew to Berlin to meet Mrs. Merkel to talk about euro bonds, which the German chancellor opposes, and a pact of European growth, whatever that means. The funny part of the story is that the plane that transported him to Berlin was hit by lightning and had to return to Paris, where he boarded a second plane. Commentators were quick to point out half-jokingly or mockingly that this was not a good omen for his presidency. Nevertheless, he came back safely and in good health. He then flew to Washington to meet Barack Obama, followed by a trip to Chicago for a NATO meeting in which he announced that French combat troops would leave Afghanistan by the end of 2012, a few months before what had been decided by his predecessor. Back in France, he had to attend an informal meeting of the European heads of government, in which nothing was decided. However, in another non-Sarkozy symbolic move, he traveled by train to Brussels, thus highlighting the image he wants to project, that of Mr. Simplicity. Finally, he flew to Afghanistan for a six-hour quick meeting with French troops and President Karzai.
On the domestic front the government took another symbolic action by decree, decreasing by 30% the salaries of the president, the prime minister, and the ministers and state secretaries. They replaced some high functionaries that were considered too close to Sarkozy. They abrogated a bad measure passed by the former government that prohibited foreign students who had successfully graduated to find employment in France. They also created a wish list of social measures to be taken in the near future: A 25% increase in the yearly family stipend for children; the hiring of 1,000 teachers as well as nurses, police, etc. (Mr. Hollande promised that 60,000 people will be hired by the government over 5 years); a modest increase in the minimum wage (known as SMIC); the return to a retirement age of 60 under certain conditions to be financed by an increase of social taxes paid by business; increased financial help to poor families (10% of French children live in poverty); and much more... One amusing measure is the decision to limit the salaries of the CEOs of public companies or companies in which the state has a majority stake to 20 times the lowest salary paid in those companies. It's another symbolic, but amusing measure as it will touch very few CEOs and create mayhem within those firms, which will see their top managers be paid more than their boss.
How these programs will be financed, no one knows exactly. On the one hand, the government wants to reduce the budget deficit, and on the other it wants to increase expenditures on social programs, however worthy they may be. So they will have to find savings and new revenues, which in a time of economic hardship is going to be difficult to realize. France's exports have decreased from 25% to 14.5% of GDP in 10 years, leading to a ballooning of the trade deficit. Corporations continue to delocalize. For instance, the car manufacturer Renault has decided to open a new plant in Morocco and is negotiating to build another one in Algeria. The government estimates that between 36 and 46 companies are in danger of or close to bankruptcy, with potential job losses of 45,000 people, as unemployment keeps rising month after month.
Of course, one way to raise more revenues is to increase taxes. Currently, the French income tax has a marginal tax rate of 41% for people making over €70,830 -- the highest tax bracket. The Hollande administration wants to increase the rate to 45% for incomes over €150,000, and to 75% for incomes over €1,000,000 in the name of social justice and patriotism. Whatever the merits of that decision, it is going to face a major hurdle, which may actually lead to lower revenues for the government. People with really high incomes are simply going to relocate, be it England, Switzerland, Belgium, Luxemburg, or Liechtenstein. London is known as the sixth biggest "French" city with a population of between 300 and 400,000 French people. South Kensington is called "little Paris" with French schools, restaurants, and many other services and businesses. According to a recent real estate report, inquiries for expensive homes (£5 to 15 million) have risen 40% since Hollande announced his plan. It so happens that the British authorities do not tax income that was earned in another country -- and London is only 2.5 hours away from Paris. Other European cities have seen those real estate inquiries increase too (e.g., Geneva, Brussels, Luxemburg). Patriotic or not, just or not, the government will have to face this reality.
Yet another possibility to avoid these taxes is for corporations to create a holding company outside of France and remunerate their top managers from that holding company and, therefore, keep them legally out of reach of the French fiscal authorities. In other words, so long as a European fiscal union is not created whereby all the countries have a similar policy regarding income taxes, the decision by the French government to increase the marginal tax rates has little chance to get a favorable outcome. The other tax rate they wish to raise is that of the ISF (solidarity tax on wealth), which is a tax paid by about 600,000 households that own assets over €1,300,000. This is a very convoluted tax, extremely difficult to figure out, which does not take into account the actual situation of each household and the prices of real estate. Finally, they are considering raising corporate taxes as well.
One has to wonder how they are going to square the circle: Balance the budget and increase the competitiveness of French businesses, all the while spending more expenditures on social programs and raising taxes. I suppose that once they get out of their antisarkozist phase they'll quickly hit the wall of reality and become more pragmatic.
Talking about Mr. Sarkozy, in the wake of his defeat, after delivering a dignified concession speech and nine days later transferring power to the new president, he left with his wife for Morocco at the invitation of the Moroccan king to decompress and has not yet spoken again. Meanwhile, his lieutenants, Jean-François Copé (general secretary of the UMP -- Union pour un mouvement populaire) and François Fillon (former prime minister), began to nastily compete for the top position of the party -- which will be decided in the fall -- thus dividing the party into the pro-Copé and the pro-Fillon camps; a battle the French call la guerre des chefs ("the war of the bosses"). It reminded me of this line written by Michel Audiard and delivered by Francis Blanche in the great 1963 movie Les tontons flingueurs: « Quand le lion est mort, les chacals se disputent l'empire. » ("When the lion is dead, the jackals fight over the empire.") It took several caciques like Alain Juppé (long-time politician, former prime minister, and foreign minister) to calm the kids down, at least until the outcome of the second round of the parliamentarian elections on June 17.
Much is at play in these elections. The stakes are very high. If the nominally Socialist Party (as I always say) wins an absolute majority, the party will be in control of the government, the parliament, the senate, and most French regions and cities. They'll have complete power. However, if the UMP wins, this would lead to a new government of what is called "cohabitation." Mr. Hollande would have to nominate a different prime minister selected by the UMP, who in turn would select a non-socialist team. Gridlock anyone? (Personally, I don't think the UMP can win, for the National Front, the Trojan Horse of the right, will compete with the candidates of the UMP, becoming once again an objective ally of the Socialist Party.)
We shall see. We'll have to wait until June 17, 2012, to learn the outcome. In the meantime, there is something truly entertaining -- following this new government, which to date is not much more than a government of the words, by the words, and for the words, and watching the waltz of ambitious people who have been out of power for 17 years and are now enjoying their new toys.
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