France Country Update

Hollande Encountering Headwinds

The center-left government led by President François Hollande was dealt a major blow to its economic policy credibility in late 2012, when the constitutional council ruled that a 75% income tax rate imposed on individuals earning more than $1.3 million annually was not consistent with the French ideal of equality before the law.
The very high tax rate on the super-rich was always suspect in terms of its practical value, but it was a centerpiece of a campaign platform that attracted support from voters eager to punish the bankers and investors that many blame for France’s current economic woes.
The setback has reinforced a steady drop in the president’s approval rating that is depleting the political capital Hollande will need to implement an agenda that includes controversial labor, welfare, and pension reforms that are crucial to boosting the country’s economic competitiveness.
Strong public support for French military intervention to battle radical Islamist rebels in Mali could give Hollande just the boost he needs. However, the recent attack on an Algerian gas facility by Islamist militants, ostensibly intended as a show of solidarity with the Malian rebels, underscores the risk that the military operation could expose France to terrorist attacks that dampen the nationalist fervor of the French population, with negative implications for the government’s political fortunes.
At the same time, the weakened state of the economy points to the strong potential for disruptive (and possibly destructive) explosions of unrest spearheaded by organized labor and/or France’s impoverished immigrant population. In that regard, it is far from clear that the government’s strategy of combining austerity with targeted spending increases aimed at spurring economic growth and job creation will produce the promised results.
Beyond the risks related to social stability, below-target growth could undermine the government’s deficit-reduction efforts. Although last year’s credit-rating downgrades have not affected France’s ability to borrow at very low rates, if combined with fiscal slippage, the negative signals from the ratings agencies could produce a damaging erosion of market confidence.

Economic Forecasts for the Three Alternative Regimes

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