François Hollande committed himself to a policy of budgetary rigour at the time of the Socialist Party presidential primaries in the autumn of 2011, which enabled him to differentiate himself clearly from his rival Martine Aubry. And for more than a year he stuck doggedly to his promise to cut the public spending deficit to 3% by 2013, as required by the European fiscal pact. And yet the government has now rushed to abandon this commitment within the space of a couple of days.
The reassessment was carefully orchestrated. As with last summer's public finance review, it was Didier Migaud, president of the Cour des comptes, or Court of Accounts, France's national audit office, who first stated the unthinkable. Presenting the court's annual report, Migaud declared that France could no longer meet its commitment to cut the deficit to the 3% threshold this year, because of the state of the economy. This had been an open secret among French economy watchers for several months, but it now looks like we are at a major political turning point.
François Hollande responded to Migaud's comments the same day, noting: "There is no point setting targets if they cannot be met." But within 24 hours Prime Minister Jean-Marc Ayrault had swiftly abandoned the promise to cut the deficit from 4.5% to 3% in 2013. "I do not think we will be exactly at 3% in 2013, for one simple reason, which is that growth in France, Europe and the world as a whole is weaker than expected," the prime minister said on France 3 television. The goal of eliminating the deficit by the end of President Hollande's five-year term remains intact, he added.
The recession that is taking hold in Europe made the 3% target unattainable this year, so dropping the 2013 deficit forecast could be seen as no more than an acknowledgement of economic reality. But the switch also masks other policy changes. François Hollande's government is now starting to conform with orthodox European policies, as we also saw at the last European summit, when France had to give in to German and British demands for European budget cuts.
Forget about the idea of investments aimed at promoting long-term growth as a counterweight to austerity policies, as was promised during the presidential election campaign and when last autumn Parliament voted for the European Treaty on Stability, Coordination and Governance (TSCG) or Stability Mechanism. And forget about the different course that the socialist government wanted to follow compared with that taken by right-wing governments in other European countries. Having tried to conduct a slightly different policy for only nine months, the French government is falling into line and the recommendations of the European Stability Mechanism will be applied to the letter. And the notorious "structural reforms" imposed on Greece, Portugal, Spain and Italy will now have to be implemented in France too.
In the corridors of power it is said that it is on this condition, and this condition alone, that the European Commission will be willing to accept France's failure to meet its 3% deficit commitment. Last Friday the EU Commissioner for economic and monetary affairs Olli Rehn indicated as much when he said France would be likely to be granted an extension on its timetable to reach the 3% deficit mark – as long as it carried out the necessary domestic reforms.
And even then, nothing is guaranteed. European Central Bank board member Jörg Asmussen has insisted that France should still try to meet the 3% target this year. While ECB president Mario Draghi told the European Parliament that one of the main risks to the eurozone economy was "the slow implementation of structural reforms". So the battle lines have clearly been drawn.
Structural reforms, French-style
Didier Migaud, now an unavoidable figure on the current political scene, once again took on the job of preparing public opinion. "The problem is that our efforts have focused on increasing tax revenues and very little on spending cuts. We now need to concentrate on public spending. Some savings are possible here," he said on Europe 1 radio on February 17th. In other words, it is now time for structural reforms, although he insisted that these should not be allowed to undermine France's traditional social model.
Europe's orthodox economic recipe is very well known. The challenge for the government is now to find a way of adapting it to French conditions.
Public spending cuts are of course the main ingredient. The government has wasted no time here and last week announced that it would reduce funding of local authorities by six billion euros over the next two years, double the previously announced cut. And budget minister Jérôme Cahuzac is preparing to send his colleagues letters on departmental spending limits six weeks earlier than normal, because this year's negotiations are likely to be quite heated and tough decisions will be required.
The government announced a freeze in public spending to 2015 when it took office, along with a 2.5% cut in civil service numbers except in the areas of education, justice and policing, and a 7% reduction in operational costs. But this budget framework has now been blown apart. To meet its commitment to eliminate the deficit by 2017, the government will have to look for far more than the 50 billion euros of savings it was initially targeting. All ministries will be affected, even those that were supposed to benefit from additional state support. All departments will be told to revise their policies, their activities and the assistance they offer.
Few people would disagree that there is scope for an overhaul of public policies, at both central government and local authority level. There is a jungle of all sorts of government measures and support schemes, which you have to be incredibly adept to find your way through, and which has been made even more complex by a badly managed policy of decentralisation. This has made policies incomprehensible to most people and has wasted a lot of public money.
The problem is that carrying out another umpteenth reform, in a rush, is likely to have the same result as previous overhauls - arbitrary spending cuts based on numerical targets that have no more substance than the 3% goal, and which further disrupt the machinery of government, rather than a real analysis of the purpose and role of the modern state.
But the government needs to focus above all on cutting social spending, according to Migaud, who says he has identified several potential areas of savings, all of which would meet with the approval of the European Commission.
The Court of Accounts president therefore gave a warm endorsement to the idea of taxing child benefit payments, a policy that has frequently been put forward in the past. In 2001 such a measure was proposed to then socialist prime minister Lionel Jospin but he ruled it out. And during the last presidential election campaign Bruno Le Maire, one of the architects of Nicolas Sarkozy's policy programme, came out in favour of taxing family allowances, until Sarkozy quickly told him to drop the idea. Migaud's comments have prompted an outcry from both right and left. There may still be a discussion and dialogue on a reappraisal of policy on the family, but there is a good chance that this will lead to a technocratic patch-up job, just as we saw with the government's tax reform.
The ghost of 1983
The Court of Accounts' suggestions also, unsurprisingly, include changes to pensions and unemployment benefit, which are also favourite themes of European neo-liberals. Conveniently, the audit office itself has recently done some work on both subjects. It is concerned that the reform carried out in 2010 did not do enough to cover the funding needs of the pension system after 2018. The government has started to look at the subject and has called for yet another report on the situation. And two possible reform measures have already been floated - a complete freeze in pensions, which would no longer be uprated for inflation, at least until 2018; or a further increase in the number of years of contributions needed to secure a full pension, to at least the age of 65.
The government seems to favour the first option, which would create fewer headlines and be less politically sensitive than the second. But it will have to explain why it is necessary to overhaul the system and make it less generous again, only three years after a reform that was supposed to solve all the problems, a reform that was vigorously opposed by the Left. The government is likely to come to a decision by late spring. By then ministers may also have had a chance to look at the Bank of France's latest report on household debt, which shows a significant increase in the number of retired people who are deeply in debt.
Meanwhile, a time bomb is ticking under the finances of France's unemployment benefit system, with almost five million people looking for work, including three million full-time unemployed. In 2012 Unedic, the body that manages the unemployment insurance system, had a deficit of 2.9 billion euros, its fourth consecutive year in deficit, and it now has a overall debt of close to 14 billion euros.
The Court of Accounts suggested some remedies to this problem in a report delivered at the end of January, focusing primarily on cuts in benefits. It is calling for the abolition of the special regime for arts and entertainment workers, which enables them to receive benefits between jobs. It also proposes a cap on the unemployment benefits paid to those previously on high earnings. And it wants to tighten up rules on the payment of unemployment benefit to those taking up part-time work, arguing that this can end up being used as a long-term income supplement for those in insecure jobs. This report has not yet officially been presented to the government, but it will doubtless soon find its way onto ministers' desks, with a helpful push from Europe.
The expected policy shift will not just mark a complete U-turn from Hollande's campaign promises. It also represents a break with the policies championed by the socialists and the Left for years, and more fundamentally an unravelling of all the principles of social solidarity that have underpinned policies since the Second World War.
The government itself is aware of the dangers and the headlines, and last week advisers to both the prime minister and the president were anxiously trying to quell talk of a change of policy or economic U-turn. They are aware of the dangerous parallels with the first term of the last socialist president François Mitterrand and his abrupt U-turn towards austerity in 1983, two years after coming to power, a policy shift that still haunts the Left.
But equally the government insists that there are no plans to come up with an increase in public spending to try to stimulate growth, nor to breach its European commitments. And that some cuts are necessary. “There's a kind of schizophrenia in the country,” says one senior figure close to the presidency. “Everyone wants to reduce public spending but everyone bays at the moon when you touch what concerns them...If you protect all public spending then you'll never get done what you need to.”
On Saturday President Hollande ruled out further austerity measures this year that would “put another brake on consumption and investment”. He added: “There is no need to add more austerity in 2013. A lot has already been asked of the taxpayer.” But at the same time President Hollande warned that spending cuts rather than tax increases would be the main method used to reduce the budget deficit from 2014.
However, the government will have miscalculated if it thinks it can get away with blaming the expected change of direction on the economic crisis and the need to conform with policies dictated by Brussels. The initial reaction of housing minister Cécile Duflot, who questioned the financial logic for a policy of undiluted austerity, shows that divisions over economic policy go right to the heart of government. The policy debate on the Left may now indeed start to have some echoes of that which followed that famous shift in economic strategy in the spring of 1983.
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English version: Steve Whitehouse
Editing by Michael Streeter