France in recession, and in deepening trouble?

The new Hollande presidency is struggling with the fraught politics of austerity

Ben Clift

Just one year after winning a famous victory in the French presidential election, François Hollande’s presidency is plumbing new depths in unpopularity as France officially fell back into recession last month. It’s true that all French presidents since the mid 1990s have experienced dramatic post-election drops in popularity as they disappoint on campaign promises about growth and jobs. But Hollande’s precipitous loss of popularity puts all his predecessors in the shade.

European commission President Barroso’s recent speech, in accepting a slightly slower pace of deficit reduction in France and some other troubled Eurozone economies, suggests a slight rebalancing of economic policy emphasis within key EU institutions.

France’s self-image of itself is that of an equal partner with Germany at the helm of the project of ‘European construction’. In this vision both countries are expected to provide the stability the Euro needs. Yet France’s inglorious debt, deficit and growth positions hinder its capacity to offer European (joint-) leadership. Hollande’s pressing task is to follow his own campaign advice and exploit whatever policy space this EU-wide rebalancing might create to pursue more activist policies in support of French growth.

Like its predecessor, the current French government understates the degree to which reductions in public expenditure contained in fiscal consolidation plans eat away at demand and growth in the economy. As we have seen, in mid 2013, even the European Commission appears to be waking up to these paradoxes of austerity politics.

In historical terms Hollande’s Ayrault government is committed to a herculean effort of fiscal consolidation – attempting a 7% turnaround in the structural balance between 2012 and 2017, half through increasing tax take, half through reducing public spending. Even the Elysée Palace’s wine cellar has not been spared, with Hollande auctioning off many of the most expensive vintages to demonstrate his commitment to restore France’s public finances!

French fiscal policy settings since 2010, and under the Hollande presidency since May 2012, have not been short of ‘fiscal effort’ to restore the public finances – although there have been different emphases struck at different moments as to where the burden of increased taxation falls and what spending commitments should be preserved.

Hollande’s fiscal consolidation is front-loaded, with 2013 and 2014 particularly restrictive, but the budgetary stance remains tight up to and including 2017.  These fiscal policy settings have had predictably adverse effects on French growth and employment levels. In this post-financial crisis recession in which, as numerous recent studies find, fiscal multipliers (the impact of public spending on economic growth) are higher, the government is straining its sinews to wring spending out of the economy. Hollande’s 2012 presidential campaign analysis of the adverse growth impact of austerity policies was pertinent, but the fact is that the ongoing Eurozone crisis and economic credibility concerns have made avoiding these consequences deeply problematic.

The underlying assumptions built into France’s multi-year planning of the public finances include crucial and damaging over-estimations of French economic growth. This is partly because the negative fiscal multiplier effects arising from contractions in public spending are not fully accounted for.

Paradoxically, it may be the ardour of Hollande’s pursuit of fiscal consolidation that has prevented him from achieving his 3% deficit target in 2013. Furthermore, potential growth (this differs from actual growth assessments by gauging underlying growth potential to calculate an economy’s ‘output gap’- needed to calculate the ‘structural balance’ target specified in the EU Fiscal Compact) seems to be under-estimated, thereby contracting the policy space for activist fiscal policy in support of growth.

Curiously, for all the Keynesian rhetoric which traditionally pervades French Socialist discussion of economic policy, the French authorities under Hollande have taken a fairly orthodox neoliberal view of the relationship between fiscal policy and economic activity. The need for fiscal activism in support of demand during a downturn, so accentuated during Hollande’s presidential election campaign, has been rather lost in the translation of the EU Fiscal Compact’s new fiscal rules to the French statute books.

Meanwhile, for all his tough line on fiscal consolidation, Hollande is continuing the long-established (and fiscally dubious) practice of avoiding grasping the nettle of either reductions in public spending or rises in taxation by over-optimistically forecasting strong economic growth in the coming period. Apparently small differences in growth forecasts translate, in fiscal consolidation terms, into enormous sums. Deeply flawed assumptions of 2% or more French economic growth each year from 2012 to 2017 thus assume away the pain of the cuts in public spending and service provision that will inevitably accompany any attempt actually to restore balance to the public finances within five years.

The problem, though, is not just Hollande’s dubious growth assumptions, but the intractable politics of French state reform. Integral to fiscal consolidation is the continuation and extension of the cost-containing reforms of the French state and public service provision begun back in 2001. In effect, the politics of fiscal rectitude in France has become bound up with protracted and difficult state reform, including commitments to nominal spending freezes and reducing civil service numbers. Many previous French governments have made similar commitments and failed.

Hollande plans to extend this agenda for the first time to French sub-national government. But, given the high degree of autonomy of local government, this agenda will be very difficult to deliver.

The upshot is that it will be substantially more difficult than is currently recognised to reach the proposed public finances targets. They also become steadily more exacting as growth falls short of the over-optimistic forecasts.

Through its adverse effects on growth, France’s fall into recession shows just how much such a strategy eats away at the very credibility fiscal consolidation was designed to generate. The success of the ambitious state and local government reforms is now crucial to hitting the targets on which Hollande has staked French economic credibility.

France’s current strategy for resolving its domestic economic problems involves high risks and high stakes, both for France and the Eurozone.

Ben Clift gratefully acknowledged the support of the Leverhulme Trust for the research fellowship funding which enabled the research for this post to be undertaken.