LONDON — When French Socialist politician Francois Hollande won the country’s presidency last year, his headline campaign promise to raise taxes on the wealthy got many investors worrying his policies would also hit the business sector hard.
Yet, the 75 percent tax rate on income over €1 million ($1.3 million), which was part of the 2013 national budget Hollande released in September, was struck down in December by the country’s Constitutional Court. And weeks later, Hollande hammered out a set of labour market reforms expected to give companies more flexibility during tough economic times.
Now, investors are wondering whether the president, a member of the French Socialist Party, may be more of a pragmatist than they had initially believed.
“He never was as left-wing as everyone thought,” said Robert Hancké, a European politics expert at the London School of Economics and Political Science. “He comes from the centrist wing of the Socialist party. I think he would call himself a social democrat in the German model rather than the standard left wing.”
The president, Hancké added, may have even been pleased when the court rejected his millionaires’ tax, which had angered entrepreneurs and other business-people, but gratified the Socialists’ base.
The ruling “was a bit of luck because it means he doesn’t have to do it, and he still gets the credit for it,” Hancké said. “He can say, ‘Look, I’ve done my best; it doesn’t seem to be quite as simple as we thought, but at least we tried.’”
The government says it still plans to seek other ways of extracting more revenue from top earners, angering many who see the approach as anti-business.
But a perceived effort by some celebrities to evade the new “super-tax” bolstered support for Hollande, making him look like a populist hero chasing down an unpatriotic elite.
Gerard Depardieu, for example, made headlines by saying he would renounce his French citizenship and move to Belgium. Russian President Vladimir Putin then presented the actor with a Russian passport. Bernard Arnault, CEO of the luxury group LVMH Moet Hennessy Louis Vuitton SA and reportedly France’s richest man, also sought Belgian citizenship, although he said it was not because of the tax hike. Both were pilloried in the press.
The labor deal, though, has helped ease private sector worries. The pact, agreed upon by business associations and three of France’s five major unions, lets companies negotiate shorter working hours and lower pay to avoid layoffs during tight times, as happened in Germany after the 2008 financial crisis. Employees will now have just two years to appeal layoff decisions instead of five.
In exchange, workers will get better unemployment insurance and health coverage and a voice on the boards of big companies. Supporters hope the deal will reduce the widespread use of short-term labor contracts, which has led to a divide between permanent workers with extensive protections and temporary employees with little security.
“The business community is happy and probably has got more than what the workers got from this agreement,” said Bruno Palier, research director at Sciences Po in Paris. “So many things they’ve been asking for over a long period have been agreed upon.”
On top of that, a decision to send more than 2,000 French troops to intervene against extremists in Mali, the deal has left Hollande looking stronger than ever.
“It may be a better period for Hollande than the first six months were; he appears stronger,” Palier said. “The polls show he is in better shape today than he was a few weeks ago.”
Analysts at Credit Suisse, in a report entitled “France – Another step in the right direction,” warned that the reforms could be weakened as the package works its way through Parliament and toward the law books. They expressed optimism, though, that the main points of agreement, which they said were “relatively business-friendly,” would hold.
“Advancing and consolidating on this reform drive would help quell the remaining doubts on France, still considered by some commentators as the possible ‘next shoe to drop’ in the euro area crisis,” said the report.
But with French unemployment above 10 percent, growth – something in short supply in Europe – should be a bigger concern than either budget repairs or changes to the labor market, said Hancké.
The labor changes, he suggested, were unlikely to accomplish much economically.
“Activity instead of solutions is what we’re seeing here,” he said. “High unemployment in the current climate is simply because growth is too low.”
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