Social liberalism: Hollande goes all in

The contrast is startling. On August 27, two days after the dismissal of his entire cabinet to punish embedded dissidents, socialist Prime Minister Manuel Valls received a standing ovation from France‘s top CEOs as he proclaimed his love for companies and entrepreneurship.

Answering this resounding “J’aime l’entreprise”, a sizeable opposition group within his own political family chanted “Vive la gauche” (Long live the left) throughout the Socialist annual convention over the weekend (August 30-31). To say that Manuel Valls’ closing address to the socialist militants Sunday night was received with scepticism would be an understatement.

Elected two years ago on a political platform to fight global finance, then labelled the “true enemy“, Francois Hollande has since implemented a complete u-turn, much to the dismay of his partisans. Faced with record unpopularity and disappointing economic results, the French president might have played his last card.

Indeed, by asking Valls to purge his government of dissenters, Hollande hopes that his stubbornness and consistency in implementing a balanced-budget orthodox economic agenda will eventually bring results and salvage his chances for re-election in three years.

A small step in the wrong direction?

Surprising everyone in France, the uncharismatic “Mr President Normal”, often criticised for his lack of authority, has turned into a poker player. Whether this will be successful remains to be seen however. It might very well prove to be a move in the wrong direction or, at the very least, too little too late.

Too little, because Hollande and Valls do not have the necessary means to unleash, by themselves, a structural shock of competitiveness and simplification as they have called for. To be effective, their economic strategy will need the support and cooperation of both the French corporate interests and the European Union, both of which will be hard to obtain.

Too late, because Hollande’s political capital has already been vastly dissipated. Even some members of his majority in parliament are now openly defying him. The “Slingers”, as they call themselves expressed their determination to resist the economic strategy implemented by the Valls government. Their ardour has been pumped up by analyses from key economic scholars such as Nobel Prize winner Paul Krugman who published a sharp critique on the ineffectiveness of the austerity measures supported by Hollande.

Not only did Krugman mock the left wing French president for implementing a traditionally conservative economic agenda, but he also warned against the counterproductive effects of increased austerity. Another economics Nobel Prize winner, Joseph Stiglitz, also blasted this strategy by underlining the “appalling failure” of these measures. Both strongly advocate for increased investment from the government and a halt in deficit reduction to unleash economic growth.

Hollande’s economic bet

Indeed, macroeconomic perspectives for France do not provide much optimism. For the second straight quarter, its economy has stagnated. While the Mediterranean countries are finally showing signs of recovery after years of economic depression and Central European economies start to attract increased levels of foreign investments, France, in comparison seems, to lag behind.

The country does not offer the cheap labour force and low regulation levels that private investors aim for when building factories in emerging European markets, nor can it compete with the industrial powerhouse and technological leadership of Germany. Stuck in between the two, France simply does not offer much comparative advantages.

So why is Hollande opting for a deepening of the very measures that proved unsuccessful until now? For two reasons: First, Hollande is making the bold bet that consistency will eventually pay, reaching a threshold that would turn a vicious cycle into a virtuous one.

It would be wrong to assume that all economic data for France are in the red. French corporations have made headlines recently by offering their shareholders the highest dividends in Europe. Unfortunately, these corporate decisions do not directly benefit the French economy as these sums could have been reinvested to create much needed jobs.

Similarly, scared by the high unemployment level, the French citizens do not spend much. France has been, for the last decade, one of the thriftiest nations in the developed world with record levels of savings, putting a drag on consumer spending in the euro zone’s second-biggest economy. Without investment and consumption, the French economy is bound to stagnate.

Siding his government strategy with corporate interests and sending Valls on a seduction mission towards corporate leaders, Hollande has made a clear gamble. The success of his set of economic measures, gathered within a “Responsibility Pact” with French companies, depends on the good will of employers to reciprocate the gesture by reinvesting and creating new jobs. This would, hopefully in turn, trigger a switch from savings to consumption from reassured French households. Hollande’s strategy makes economic sense but he has pushed all his chips towards the corporate powers in the hope that they will not let him down.

The real battle is being fought in Brussels

The second reason for the French president’s gamble is that he does not have much choice. Hollande has to comply with France’s European commitment of deficit reduction and his margins for manoeuvres are slim. France cannot afford to engage in the expansionary agenda called for by Krugman, Stiglitz and the Slingers, because that would result in European sanctions. Brussels already issued Paris an official warning in March and the French confirmation in August that it would be incapable of reaching its deficit reduction objectives was not well-received.

A modification of those European rules is probably much needed but can only be achieved through a consensus between European countries. Unfortunately for Hollande, his regular attempts to lessen the German inspired European economic diktat have been in vain for now. Here again, Hollande made a risky gamble by betting that Brussels would soon implement a shift in its policies and that Germany will eventually give in.

To be fair, recent signs prove he might have chosen the winning horse. Mario Draghi, the head of the European Central Bank himself, supports the strategy and unveiled an unprecedented rate cuts and lending package. Mariano Rajoy, the Spanish PM, seems to have convinced Merkel that austerity measures and stimulus spending are “two sides of the same coin” and the Italian government is strongly backing Hollande’s calls for European economic reforms. A key indication that the wind is turning would be the nomination of Pierre Moscovici, the French former finance minister for the coveted job of European Economic Commissioner.

We will soon know if Hollande failed miserably or was a visionary, leading an important structural overhaul of the French economy and a European economic strategy reform. If he miscalculated his bets, the extent of his failure will be unprecedented, and he will not be running for re-election. What is clear already is that the consensus oriented “Mr Normal” is no more. He has given way to the risk-taking and authoritative “Mr All In”.