HOLLANDE VICTORY NO GAME CHANGER FORFRENCH PUBLIC FINANCES.
policy differencesbetween Sarkozy and Hollande regarding publicfinances should not be exaggerated
. Both embracedeficit reduction although they seek to do so mainlythrough tax increases rather than through less growthtoxic spending cuts. Hollande aims to balance publicfinances by 2017, one year later than Sarkozy and wantstax increases to play an even greater role in place ofspending reductions. Hollande also demands changes tothe EU fiscal discipline treaty to include provisions topromote growth, potentially delaying the ratificationprocess.
Whoever wins the election will be forced by bondmarkets to adopt an uncompromising approach tothe deficit
; any major change in policy to ease austeritywill be swiftly punished by rising bond yields. Sarkozywould need to find additional budget savings whileHollande would be forced to abandon some spendingplans. Neither candidate has prepared the voters for thefact that many campaign promises will need to be eithercompromised or scrapped.
ELECTION CAMPAIGN LACKS REFORM AGENDA.
Surveys indicate that economic issues are the mainconcern of French voters with unemployment and wagesof greatest significance. Issues regarding nationalsecurity, highlighted by the Toulouse terrorist shootings,are relatively unimportant to the French electorate.Unfortunately,
voters’ economic concerns have beenmet with proposals generally hostile to business
Sarkozy and Hollande announcing severalpolicies to increase taxes but very little in the way ofeconomic reforms to improve competitiveness andstimulate economic growth.Hollande has announced a top marginal income tax rateof 75 per cent on annual incomes above EUR 1.0mn.Including other charges, the top marginal rate mayexceed 90 per cent. Corporate taxation of the financialsector will increase to almost 50 per cent; stock optionswill be outlawed; and bonuses capped. Hollande will alsoseek to increase the annual wealth tax and raise theminimum wage. Sarkozy has proposed a new tax onforeign sales by French multinationals. Several majorFrench banks are said to already be exploring possibledisinvestment options, relocating all or part of theiroperations overseas. Current campaign proposals lookset to reinforce their willingness to do so. For example,French firms are already struggling to hire foreignemployees. Investment banks and international law firmswould be especially liable to move abroad given theirrelatively high mobility.
A Hollande presidency would have severalsimilarities to President Mitterrand’s victory in 1981,
and is perceived to be as negative by the markets. Forexample, the election follows a long period of austerity.Also, Hollande has declared the financial sector anenemy and opposes a global policy consensus onausterity.However,
most proposals with negative implicationsfor business would take effect in the long run ratherthan the short term.
Just as problematic is the fact that
neither Hollande nor Sarkozy are discussing how (orindeed whether) they intend to resolve France’sfundamental, longer-term problems,
including weakcompetitiveness, slow economic growth, and large scalestate-influence (public spending accounts for 56 per centof GDP). The proposed measures do nothing to addressthese problems.
France needs a comprehensivestrategy for economic reform and neither Sarkozynor Hollande are able or willing to provide that.
THE FRENCH BANKING SECTOR FEARS A HOLLANDEVICTORY.
Markets are particularly concerned by theprospect of a Hollande victory although Sarkozy alsoproposes to introduce a financial transaction (“Tobin”)tax which would harm the financial sector.
Hollande haspledged to separate banks’ retail activities from“speculative” investments,
a move which would jeopardise
France’s universal banking model. Analystshave estimated that
pledge could reduce Frenchbank earnings by up to 10 per cent
. The Frenchbanking sector is already under pressure due to capitaland liquidity rules imposed by the European BankingAuthority. Hollande has also proposed a 15 per centincrease in corporate taxation of banks.Of course, several of Hollande’s pledges are likely torepresent pre-election posturing with a total break-up ofthe French banking model unlikely. However,
Frenchbanks are expected to bear an additional tax burdenand reduced earnings irrespective of whichcandidate wins.
THE END OF MERKOZY?
A Hollande victory wouldcertainly terminate the special relationship betweenSarkozy and Angela Merkel. Although their interactionhas been plagued by substantial differences inpersonality and temperament, Merkel and Sarkozy havebeen forced to learn how to co-operate. Despitedifferences of opinion
the basic understandingbetween Sarkozy and Merkel that the euro zoneneeds to put its’ public finances in order has neverbeen in doubt
.Hollande opposes German pressure for additionalausterity measures. He also wants the ECB to act as euro