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Analysis: Mitterrand's shadow looms as Hollande seeks to revive France

French President Francois Hollande listens to the speech of French Prime Minister during a new year ceremony with members of the government
French President Francois Hollande listens to the speech of French Prime Minister during a new year ceremony with members of the government

By Leigh Thomas

PARIS (Reuters) - France's deeply unpopular President Francois Hollande appears to have found inspiration from his hero Francois Mitterrand, announcing an abrupt pro-business lurch in tax policy that echoes moves by his Socialist predecessor 30 years ago.

Desperate to revive the euro zone's second-biggest economy in the face of near record unemployment, Hollande said in his new year's address he would cut companies' labor cost in exchange for firms hiring more workers.

Hollande, who polls show has become the least popular French president in modern history, called the measures a "responsibility pact".

Business leaders have cautiously welcomed the prospect of cuts to labor cost that they say make it harder to add jobs in France than elsewhere in Europe. Unions and Hollande's leftwing allies in parliament have expressed reservations.

Hollande's move is a nod to Mitterrand, who two years into his own presidency, with the French economy and his personal popularity cratering, announced a turn towards pro-business policies more commonly associated with the right than the left.

Hollande's admiration for Mitterrand runs deep: he has been known to take inspiration not only from his Mitterrand's policies, but even his turns of phrase.

The detail of his new proposal has yet to be announced, and the political consequences sound severe. Giving a tax cut to companies means either raising taxes on individuals, cutting back state spending on benefits, or both - all likely to be unpopular with voters who elected him in May 2012.

But with his approval ratings having fallen so far already, Hollande may have little left to lose. Municipal elections loom in March with the Socialists expected to take big losses.

"The political cost has already been paid. It's a matter of emergency now," said Deutsche Bank economist Gilles Moec.

Shifting more of the burden of financing welfare to households would weigh on consumer demand, the traditional motor of French growth, but that would be a necessary price to pay to rebuild French firms' competitiveness, he added.

DEJA VU

The proposals are deja vu for veterans of Mitterrand's 14 years in power. As the first Socialist leader of France's post-1958 Fifth Republic, Mitterrand spent his first two years in office nationalizing industries and expanding worker benefits, only to abruptly switch course in 1983 as public finances and his own popularity crumbled.

Mitterrand's government, which included then budget minister Laurent Fabius - now Hollande's foreign minister, launched an austerity drive and sought to restore corporate competitiveness by breaking the indexation of wages to soaring inflation.

The move came to be known in France as the "tournant", or turning point, guided by economy minister Jacques Delors, who went on to become president of the European Commission.

Mitterrand's Socialists would go on to lose parliamentary elections, forcing him to serve under "cohabitation" with a right-wing prime minister. But France's economy and Mitterrand's personal popularity both eventually recovered, and Mitterrand was reelected to a then-unprecedented second term in 1988.

Critics and supporters alike referred to Mitterrand's volte face as "supply-side Socialism" - a leader of the left adopting the pro-business policies to spur economic growth associated at the time with conservative U.S. President Ronald Reagan.

The phrase has been dusted off 30 years later by newspapers, and even embraced by Hollande's aides: "Supply-side policies are not necessarily only right-wing policies," an official in Hollande's office said.

Hollande's proposals have yet to be fleshed out, and corporate chiefs are waiting for the details before they break out the champagne.

"Hollande's words are interesting to hear but it all depends on how it takes form," said Serge Papin, the head of supermarket chain Systeme U, on BFM TV.

On the left, unions have made clear their skepticism clear. Jean-Claude Mailly, head of Force Ouvrier, one of France's big three labor unions, told France Inter radio the proposed responsibility pact was "worrying".

"It's in purely supply-side logic," he said. "He made no mention in his speech about purchasing power, which is a top concern for the French."

TURNING POINT OR BREAKING POINT?

So far Hollande has pursued cautious reforms of labor market regulations and pensions, and introduced a tax credit scheme designed to lower the cost of employing people by 20 billion euros ($27 billion) a year.

Companies say he has to do far more to lower their costs to make them competitive.

"If Hollande goes all the way, it could be a turning point, but he will have to act quickly," said Philippe Waechter, chief economist at Natixis Asset Management. "We cannot allow ourselves to have such a generous welfare system as when France was enjoying growth of 2-3 percent."

Corporate profits make up a smaller share of the economy in France than anywhere else in the euro zone, according to data compiled by Eurostat.

The gross operating surplus of non-financial corporations - Eurostat's main measure of corporate profit - slipped to 27.7 percent from 28.2 percent in the third quarter, the French statistics office said last month. That is the lowest figure since late 1985. Workers' welfare contributions and taxes on employers rose 0.9 percent from the previous quarter.

By contrast, Germany, Italy and Spain, the other three big euro zone economies, each recorded corporate profit figures of around 40 percent. http://link.reuters.com/jur47t

"The French economy can get back up on its feet and job creation can return, but vital reforms are needed," said Pierre Gattaz, the head of the Medef bosses association in reaction to Hollande's new year's announcement.

LAGGING BEHIND

With economic recovery gradually taking hold in the crisis-weary euro zone, France increasingly stands out as some of its key economic data continues to deteriorate.

Manufacturing activity shrank at the fastest pace in seven months in December while it improved almost everywhere else in Europe, according to a monthly purchasing manager survey published on Thursday.

In another sign of weakness, new car sales slumped 5.7 percent last year in France despite an upturn at the end of the year as the industry, a big employer, struggles with excess capacity in the face of weak demand from consumers worried about unemployment, currently at 10.9 percent.

"There's a need for some kind of jolt. You can't just sit and wait for a recovery in world growth," said Deutsche's Moec.

With family benefits currently financed by corporate levies, employers want to see much of the 36 billion euros it costs them annually shifted to taxes paid instead by households, for example through higher value added sales tax.

Waechter said that labor costs would have to be cut by at least another 20 billion euros, which would have to be financed by cuts to welfare spending since workers would be up in arms if wage cuts like those in Greece or Spain were forced on them.

For his part, Moec urged deep cuts in spending by the myriad layers of local government and overhauling generous unemployment benefits as well as widening the tax base for welfare spending.

($1 = 0.7322 euros)

(Additional reporting by Julien Ponthus; Editing by Peter Graff)

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