Hollande reshuffles as case for less austerity and more fiscal stimulus forces his hand

Tue, Aug 26, 2014, 01:01

For the second time in four months French President François Hollande has reshuffled his Socialist government, this time in response to a cabinet split, and a revolt by left-wing ministers against the market reform policies of prime minister Manuel Valls. Last weekend Arnaud Montebourg, the economy minister, called for a “major change” in government policy – for less austerity and for a fiscal stimulus to boost growth. He was highly critical of the reforms favoured by Mr Valls and supported by the president – as they attempt to revive a stagnant French economy by cutting taxes and reducing spending. Mr Montebourg was also sharply critical of Germany for imposing its “austerity policies . . . on all of Europe. ”

The French president has found himself in a similar position to his Socialist predecessor, François Mitterand, in the early 1980s. Both were elected on a left-wing agenda, and both had to reverse policies sharply, as the French economy slumped. Mr Mitterand devalued the franc three times within two years, as unemployment and inflation soared. Now Mr Hollande has made three major changes in his ministerial team in a similar time period, as high unemployment (10.2 per cent) and low growth have forced a similar U-turn.

Mr Hollande is struggling to make the French economy more competitive from a position of political weakness. No French president has had a lower poll rating – 17 per cent– which has left him with less political authority to sell market reforms and deficit reductions. However, the French government’s economic difficulties are mirrored elsewhere. Italy’s prime minister, Matteo Renzi has argued for some easing of the euro zone’s fiscal restraint to boost growth, and to check deflation. However, the European Central Bank (ECB) president, Mario Draghi, last weekend struck a more encouraging note. He too favours greater flexibility in how the euro zone’s fiscal deficit rules are applied, if the ECB is to consider seriously a further loosening of monetary policy, in the form of quantitative easing.