François Hollande, a year on

A year into his Presidency, François Hollande is struggling. Of all the analyses made of his first year in office, very few have been positive. At The Current Moment, we commented extensively on the elections a year ago and on Hollande as a leader (see here, here and here). A few points are worth reiterating to make sense of today’s widespread disappointment.

It is important to remember that what secured Hollande’s victory a year ago was the prevailing anti-Sarkozy sentiment. Some of that feeling came from a rejection of the substance of Sarkozy’s presidency and so signalled a real endorsement of Hollande’s agenda. But much of the anti-Sarkozy feeling came from a reaction against his style: showy, celebrity-focused, hyperactive, lacking the gravitas expected of the President of the Republic. This list could go on.

Far from challenging this superficial rendering of politics as a matter of competing styles and personalities, the Socialists launched their own brand: normality, embodied in the rotund (but much-slimmed) cheeriness of François Hollande. He enjoys football, he makes jokes, he will govern through the country’s institutions and not above or alongside them. The notion of the ‘normal presidency’ never really stuck, not least because it lacks any capacity to inspire. But it did just enough to give Hollande the election victory on May 6^th. Other factors counted too of course: his promise of a 75 per cent tax on incomes above 1 million Euros was timed perfectly to play on the anger felt towards high earners living in luxury at a time of social crisis. Even then, Hollande’s victory was wafer thin. He edged in front of Sarkozy by very little in the first round (28.63% to Sarkozy’s 27.08%) in comparison to Sarkozy’s thumping victory against Ségolène Royal back in 2008. In the second round, Hollande secured 51.64% of the vote, to Sarkozy’s 48.36%.

Throughout the campaign, the gap narrowed between the two leading contenders, transforming what many thought would be a sure victory for the Socialists into a very narrow one indeed. Hollande, an unremarkable figure until then, tipped by few as a likely winner for the presidency, certainly held his nerve. More than anything else, though, he was in the right place at the right time. This explains why his popularity has plummeted. Constructed on the back of the antipathy towards Sarkozy, the fading memory of the latter brings with it a steady erosion in Hollande’s popularity. This is not a problem of voters forgetting the past too easily. It is a product of the negative and opportunistic campaign of the Socialists in 2012.

Hollande’s difficulties today are also to do with what has happened since May 2012. The gay marriage bill has been pushed through but at the expense of a widespread societal mobilization against it, one that brought many people out of their provinces and onto the esplanades of the country’s capital. This author remembers seeing dozens of coaches, all full to the brim, tearing through the Bois de Boulogne on a Sunday morning on their way to an anti-gay marriage demonstration and all coming in from well outside of the capital and its surrounding suburbs.

One event that hit the government particularly hard was the Cahuzac affair: the admission by a government minister, the minister for the budget no less, after many months of denial, that he had a bank account in Switzerland which he kept hidden from the French taxman. The reason the Cahuzac affair has been so damaging for the government is that Hollande’s critique of capitalism, and in particular those private companies and private individuals that escape paying taxes, was always a moralistic one. Hollande presented his case against finance as a moral crusade: it was a war against the vulgar anti-egalitarian materialism of the financial class, fought in the name of the republican values of common good and a sense of patriotic duty attached to contributing to the public coffers.

Cahuzac’s secret Swiss bank account struck at the heart of this moral crusade by bringing those corrupt values into the heart of Hollande’s cabinet. In some ways, Hollande can’t be blamed for having trusted someone who then betrayed him. To misjudge someone’s character is something we have all done at some point. For Hollande, the difficulty was that there was nothing other than this moral crusade underpinning his critique of capitalism. What could have been dismissed as a mere personal failing on the part of an individual, had Hollande’s critique been more substantial, has had the effect of a devastating blow.

This crusade against finance has also been exposed to the harsh winds of the continuing national and European crisis. On this, the French government has managed to achieve very little. A central plank of Hollande’s campaign was his promise to rewrite the European Fiscal Compact, notably by injecting into it a strong growth component. Even at the time, it seemed improbable that Hollande – after the election – would travel to Berlin and tell Angela Merkel what to do. Unsurprisingly, very little in the Compact was changed and Hollande has so far struggled to dent Merkel’s determination to stick to her austerity agenda in the run up to elections in Germany in the Autumn. Promising a radical shake up of France’s sclerotic economy, Hollande commissioned a report from prominent industrialist, Louis Gallois. Focused on competitiveness, Gallois suggested a number of ‘shock’ measures which the government chose to ignore. Hollande may still pursue a reform agenda, by bringing Gallois or someone like Pascal Lamy into a more technocratic cabinet after a summer reshuffle. But there is little momentum in either the reforming or the staunchly anti-austerity direction, leaving all sides unhappy at the government’s immobilism.

Hollande has tended to make his case by courting fellow travellers, latching onto Southern European leaders like Rajoy, or more recently Enrico Letta, whose national difficulties expose the limits of the German austerity agenda. Alliance-building, however, is no substitute for a programme. As remarked upon by Current Moment co-founder Alex Gourevitch, the fact that the case for austerity is currently unravelling has more to do with the pain it is inflicting on European societies and rather less to do with any political alternative being proposed by its growing army of critics.

The political economy of Brixit

At the end of this week, David Cameron will deliver “the speech”: his much talked-about and endlessly-put-off speech on the place of the United Kingdom in the European Union. Choosing to give the speech abroad, in the Netherlands, Cameron is hoping to gain the gravitas of earlier famous speeches on Europe, like Thatcher’s in Bruges in 1988. After so much feverish speculation, the speech will probably disappoint. But it does raise the question of what exactly is going on with the UK and its relations with the EU. Is “Brixit” really likely? Does anyone actually want it to happen? Or is the debate only really about a more cosmetic recalibration of the UK’s membership of the EU?

The Current Moment has previously argued that were “Brixit” to occur, it would be rather in the manner of the “accidental divorce” of Slovakia and the Czech Republic: a curious historical event, where neither side was virulently separatist but a split occurred nonetheless. But how likely is “Brixit”? The Current Moment also suggested that it was unlikely given how implicated the UK is in the EU. The country is far more of a member state than its political leaders admit and finds itself active in the policymaking process even in areas where it has formally opted out.

Even if the UK doesn’t leave, current events still need to be explained. Why this particularly awkward relationship to the EU? Why the prominence of Eurosceptic movements like UKIP and the political classes’ fixation – above all on the Tory side – with reclaiming power back from the EU? Some of the explanation is historical: the UK joined later than many other members after having been rebuffed twice by Charles de Gaulle and made itself unpopular by trying to renegotiate its membership immediately upon entering. Thatcher’s long-standing battles against the European Commission no doubt left scars on both sides. But these explanations are too dated to have much purchase on events in recent years and they don’t explain the climate within the UK and the virulent anti-Europeanism of some its political class that is pushing a rather neutral David Cameron in the direction of “Brixit”.

One powerful argument is that the British establishment, and its political class in particular, does not need Europe in the same was as others do in the rest of Europe. There are various economic ties between the UK and Europe that make the case for EU membership rather strong, as Lord Heseltine and others have argued recently. But the political economy of UK membership in the EU is somewhat distinctive from other member states. In short, the UK has managed its transition away from postwar social democracy on its own, without too much reliance on the EU. Compare Thatcher and Mitterrand. At exactly the same time as the British police were – on Thatcher’s orders – fighting pitched battles against the trade unions, Mitterrand was undertaking his own retreat from Keynesianism via the European backdoor. Rather than take on the militant elements of the French working class directly, Mitterrand preferred to rely on European agreements as a way of slowly and partially dismantling the mixed economy model of postwar capitalism. Thatcher attacked the public sector directly, Mitterrand – and Kohl – did so indirectly via European directives. The same holds true for other countries – like the Netherlands, Belgium and Denmark – where old corporatist models of national capitalism were slowly reformed and wound down via a reliance on European agreements. From the Maastricht Treaty to the Lisbon Agenda to the present day Fiscal Pact, the management of socio-economic change across European societies has been conducted collectively at the European level. In the more extreme cases, like Italy, the vast swathe of the political class believes that macro-economic stability can only be achieved if the country is bound up tightly within a set of European rules. The Euro – with its Stability and Growth Pact and now with the new rules being introduced – was the apotheosis of this particular approach to governing national societies.

In contrast to all of this, Britain has generally managed the transition alone. Its own way of dismantling the postwar social contract was to isolate decision-making power from the authority of the national legislature. Politicians gave up powers to independent bodies, from the multiple national regulatory agencies to the Central Bank and the Office of Budgetary Responsibility. Decision-making was located outside of politics, but not outside of the UK as such.

For this reason, the British political class needs the EU and Brussels much less in the governing of British society. The EU is less tied up with the transformations of British capitalism than it is the transformations of national capitalisms on the continent. That leaves the door open to all the parochialism and xenophobia that animates the British political debate on the EU. This also makes it possible, though still unlikely, that the UK would leave the EU.

The Florange affair

As long-time observer of French politics Art Goldhammer has pointed out, there is little in the French government’s battle with the Indian steel magnate, Lakshmi Mittal, that makes sense. Uncertainty prevails over what deal the government has done with Mittal, what promises he may or may not have given, and what the future is for the Florange plant that is at the centre of the whole affair.

One thing that seems to be clear: there will be no forced nationalization of the plant, as argued for by France’s industry minister, Arnaud Montebourg. Well-known as a voice on the left of an otherwise rather centrist Socialist government, Montebourg has long championed the cause of “de-globalization”: a return to national protection and a more traditional national industrial policy of old. Montebourg plunged into the Mittal affair by criticizing publicly the Indian businessman, accusing him of not keeping his promises. His proposed solution – that gave much hope to the workers of the steel plant threatened with closure – was to force a nationalization of the plant. Mittal resisted, saying he was willing to let the government take over some of the plant but he wanted to retain those elements he thought could be profitable. At issue are two blast furnaces at Florange which Mittal argues are no longer worth keeping given the overcapacity of steel production in Europe. As demand for steel has fallen, so Mittal has been forced to rationalize production. Existing demand can be met by steel production in other sites, such as Dunkirk (read economist Elie Cohen on this here), leaving the Florange furnances without customers. As the government wasn’t ready to cough up the cash needed for a full nationalization, and many in the government were opposed to doing so, it made a deal with Mittal. Though Mittal committed himself to 180 million Euros of investment in cold steel processing at Florange, the issue of the blast furnaces remains unsolved. The government is claiming that it has saved the 629 jobs that were threatened but the unions don’t think Mittal will keep his word.

What is really at stake in this affair? In many ways, it seems distinctly French and confirms much of what The Economist wrote about France a few weeks ago in its special report on the country. Loud union reps camping out at the entrance to the site, vitriolic anti-capitalist rhetoric from leftwing ministers, behind-the-scene deals brokered between political and business interests: all evidence of the poor state of corporate France.

Beyond some of these clichés, two issues stand out. One is to do with Montebourg. His appointment as minister responsible for revitalizing French industry was surprising. As someone who harbours ambitions far grander than saving a few hundred jobs on the Franco-Luxembourg border, Montebourg could have been expected to resist the poisoned portfolio. It was obviously going to mean fighting a losing battle over unproductive sites like Florange and yet he accepted the job. What has been tested in the Florange affair is Montebourg’s representativeness. Does he stand for a strong current in French opinion and within the Socialist Party about a state-led route for industrial rejuvenation? Is it correct to see France as torn between its Colbertian instincts of old and a new recognition of the need for liberalisation and market-driven competitiveness? This is the kind of ideological battle The Economist likes but events over the last few days suggest something rather less dramatic is going on in France. Montebourg doesn’t seem to have his own industrial strategy but nor does the government. At the very least, strategies are about choices and priorities. What the government’s response over Florange has demonstrated is immobility and fright: unwilling to give up on the Florange workers and yet unable to place their intervention in this case within a wider plan for French industry. Montebourg appears as the fire-fighter in chief more than as a voice for an alternative French industrial strategy.

The second issue is about nationalization itself. Elie Cohen argues that the Florange affair is different from other recent instances of nationalization: General Motors in the US, Alstom in France. He is right to point to differences: there is little in common between Florange and the company-wide restructuring that resulted from the government takeover of General Motors. But he doesn’t mention the other obvious case of nationalization, that of banking and financial institutions. Via bail-outs, some of these have become the property of tax-payers. In all cases, this was evidence of massive strategic intervention by public actors to save a financial system they believed was on the rocks. Why is it that such interventions are free from the sense of helplessness and pointlessness that government involvement in failing manufacturing industries evokes for all observers?

Former Danish Prime Minister, Poul Rasmussen, an articulate European social democrat, once made the observation that many Western politicians appear unwilling to accept a shrinking of their country’s financial sector but they are willing to run down almost entirely their manufacturing sectors. He put this down to a deference elected representatives felt in the face of suave and sophisticated bankers. He perhaps exaggerated the point but it is certainly true that whilst government intervention to save failing industries appears to us anachronistic, intervention to prop up a tottering financial sector is seen as far-sighted and brave. This is surely as much about sentiment as it is an objective assessment. After all, a reason why the government couldn’t afford to nationalize Florange is that it still hasn’t paid off the debts incurred in saving its banks. These are the kinds of priorities the French government cannot articulate but they are nevertheless there in the background and structure government action over the mid to long term. There is no strategy there, but an underlying structure of interests and relations of power upon which French society rests.

Winds of change in France?

Much has been said and written about the Gallois report on competitiveness, made public earlier this week. The 31^st report on competiviness produced in the last 10 years, this one had been commissioned by the French prime minister. Louis Gallois, a prominent figure in French industrial life, is seen as able to bridge the divide between French business and the French state. Relations have soured recently between the two, in particular between small and medium sized businesses and the recently elected Socialist government. Gallois’ own career has involved heading large companies that are competitive internationally but are also very closed tied to the French state. He is an emblematic figure of French state capitalism.

The report itself rightly highlighted what is a pressing problem for France: a looming deindustrialisation. France is in the difficult position of straddling an increasingly empty middle ground. On the one side, there are the high-quality goods produced by an export power like Germany, goods that remain expensive but whose quality guarantees that they dominate the high-end markets for cars and many other industrial products. On the other side are lower quality goods from Asia that win-out on price. They are cheap and good enough to crowd out slightly better quality but signficantly more expensive French-made products. Stuck in between this polarisation, France has in the last 10 years lost a great deal of export market shares. Hundreds of billions of Euros of exports have been lost and around 750,000 manufacturing jobs have gone in the last decade. This was not always so: until the early 2000s France enjoyed a strong showing on the balance of payments, not least relative to Germany. But it has now gone deeply into deficit, as the graph below shows. France has not seen the kind of reversal of fortunes that Spain, Greece or Portugal have but its current acccount deficit has been steadily growing.

The report itself recommended that the burden of social security payments should be shifted – to the tune of a 30 billion Euro transfer – away from business and salary contributions and towards generalized taxation, in the form of the CSG tax (generalized social contribution) and VAT. French economist Jean-Claude Casanova put it thus: when employees decide to have babies, companies face a rise in labour costs that in some cases can push them into the red. Bizarrely, as soon as the main recommendation of the Gallois became known – what the author referred to as a “confidence shock” for French business – the government declared that it would not be implementing this particular recommendation. It preferred a different system for lowing labour costs that involved a complex credit transfer system. Companies will have to work out for themselves what they can win back from the state through these transfers, something that favours large companies with bulging accounting departments. Smaller firms, the ones suffering most from declining competiveness, will find the system opaque and difficult to implement. Regardless of where you stand on the rights and wrongs of the labour cost/competitiveness debate in France, the government’s handling of the report was poor.

It would be wrong, though, to dismiss all this with a gallic shrug and a muttering of plus ça change. The business newspaper, Les Echos, points to one recommendation in the report likely to be taken on by the government and one which could have a very considerable impact on France in the medium to long term. Gallois proposed that French firms systematically include in their governing bodies worker representatives. In companies with more than 5,000 employees, between a quarter and a third of the members of these governing bodies should be worker representatives. Les Echos celebrates this as a signal that France will move in the direction taken up by Germany, Austria and other countries with much more successful industrial policies than France. In the German case, this rule is applied to companies with more than 500 employees. For companies with over 2,000 employees, the proportion of worker representatives in these governing bodies rises to 50%. Les Echos argues that therein lies the key to Germany’s success in turning itself round and boosting its competitiveness.

What Les Echos is getting at is labour discipline. German companies were able to boost competitiviness in the absence of currency devaluations largely because German workers accepted the cost-cutting measures being proposed, many of which were harsh and involved temporary unemployment. As well as the German government having a strong hold over unions, company directors themselves have a better hold over their own workforce. The consensual way labour and business interests within German firms implemented the competitiveness drive of the mid to late 2000s in Germany goes a long way to explaining Germany’s present export success. France has famously been an example of a very different kind of industrial relations: more conflictual, dominated by the role played by unions, resistant to change. What the Gallois report proposes is a way in which French labour could be better controlled. If implemented, this could have a far greater impact on French industry than the more public spat over VAT, CSG and how to finance social security. At least, that is what Les Echos hopes. Perhaps, in focusing on its rejection of Gallois’ proposal to raise CSG and VAT, the government is deflecting attention from other measures, that could be more far-reaching in the long term. French business-labour relations will not be transformed over night but this could be the beginning of a greater disciplining of labour through co-option into the decision-making process.

The problem with Peugeot-Citroën

There are some classical components to the problems faced by one of France’s best-known car-makers, Peugeot-Citroën. An economic downturn has hit Peugeot-Citroën’s sales. Its dependence on car-buying in the Southern European markets of Spain, Italy and Greece was higher than some of its rivals and so it has been harder hit by the Eurozone crisis. It hasn’t so successfully relocated production to cheaper parts of Europe, as Germany’s Volkswagen has done for instance, meaning that labour costs remain high. The decision to close its large plant North-East of Paris, at Aulnay-Sous-Bois, was an obvious case of shifting manufacturing activity out of France to places where wages are lower. Overall, margins are tight in an incredibly competitive industry and the downturn has pushed the less competitive players to the edge.

Looking more closely, though, the picture is more complex. This week, the French government intervened in the company’s crisis. Having long spoken about the need to limit the famous “plan sociaux” of big French firms, the government’s intervention was not directly aimed at limiting the number of jobs to be lost through the closure of the Aulnay plant. In fact, the government seems largely to have accepted that Aulnay will close. Instead, the intervention took the form of a bail-out of Peugeot-Citroën’s financial arm, Banque PSA Finance (BPF). Faced with the threat of a credit downgrade of 5.6bn Euros of its debt, owing to the declining fortunes of the car firm, the bail-out is reported to involve a guarantee of around 4bn Euros of debt and the supply of new credit lines of up to 1.5bn Euros.

It is no coincidence that the government intervention is in the form of a bail-out to the financial arm of Peugeot-Citroën. In recent years, the car-maker has made money not just out of making and selling cars but also out of financial activities associated to its car business. Involving itself in the provision of credit to potential car-buyers has been one way the company has managed to stay in the black. In the third semester of 2011, the total revenue of the company rose by 3.5%. However, this growth did not come from car sales as such. It came mainly from the company’s component manufacturing arm (Faurecia), its manufacturing logistics arm (Gefco) and from its bank, BPF. As with other automobile companies, Peugeot- Citroën has had to rely on revenue streams other than just those of car manufacture. As the company began to rely on financial activities, it became increasingly vulnerable to any rise in its borrowing costs. This is what is happening today, hence the government bail-out. Paradoxically, the very success of Gefco means that may be sold by Peugeot-Citroën in an asset fire-sale intended to raise much needed cash (for details on the Gefco sale, see here).

The events at Peugeot-Citroën appear as a classic case of government intervention in an ailing manufacturing sector. In fact, the government is bailing out a bank owned by the car company, set up as a way of profiting from credit provision. This suggests that it is easier for a government to channel funds in ways that keep a financial subsidiary afloat than it is to prevent mass redundancies and factory closures. It also tells us of the extent to which car-makers today rely on more than just selling cars to balance their books.

Betting on austerity

Recent announcements by the European Central Bank have suggested a renewed round of activism for the Frankfurt-based institution. On The Current Moment, we have commented on how the Euro has become a material constraint for a regional economy still marked above all by national variations and diversity. Previously, during the 1990s, national governments across Europe invoked the constraints of the Maastricht convergence criteria as reasons to cut spending and to elevate macro-economic policymaking to a quasi-constitutional status and thus untouchable by the masses. At that time, the Euro was more a political strategy than it was a real material constraint. Today, this has changed. Ideas become entrenched in institutions over time and are subsequently more difficult to challenge or to transform.

Looking at Draghi’s recent decisions, and seeing how promptly France has entered into the austerity camp, we can also see that the Euro serves as a sanction for the lack of political experimentation in Europe today. The claim that “there is no alternative to the Euro”, made by Draghi, Merkel and others, is shorthand for saying that there is no alternative to the approach adopted so far in response to the Eurozone crisis: backhanded financial transfers to Europe’s ailing financial sector combined with much more public austerity measures designed to reassure markets about the long-term viability of European economies.

Draghi’s speech last week – taken by some as leap into new terrain for the ECB – was a reiteration of this same approach. Though the ECB’s announcement appeared to transform the ECB into a lender of last resort, it was in fact just one big bet on austerity. The novelty of Draghi’s announcement was that bond purchases – hitherto tightly limited to precise and timely interventions – would be unlimited. The head of the ECB also promised that the ECB would rank itself as equal to other creditors, meaning that its bond buying would not result in private creditors finding themselves unceremoniously pushed behind the ECB in the pay-back queue. Taken at face value, Draghi seemed to be doing what many have argued should have been done a long time ago: transform the ECB into an institution with the powers to print money in the event of real crisis.

Looking at the decision more closely, we see that Draghi was more cautious (see here for a useful discussion of how previous bond-buying efforts by the ECB have failed to have their intended effect). What he was in fact proposing was unlimited bond purchases on the condition that needy economies commit themselves to the conditionality set by the EU creditors. His promise also rests on the very big assumption that the austerity measures being introduced across Europe will in the medium term lead to a return to growth. Because if not, then there is no amount of ECB backing that will do the trick. On conditionality, there are reasons why some governments may balk at accepting the terms coming from Brussels. Cooked up by national and European officials, these conditions are likely to be far-reaching and Spain’s leader, Mariano Rajoy, has quite a bit to loose by accepting them. On the effect of austerity, the assumption seems to be that if governments make the tough cuts necessary to get back to budgetary balance, they will also return to positive growth. Looking around Europe, this is difficult to believe.

Draghi’s move is firmly within the European consensus about the need for bailouts to the financial sector combined with drastic cuts in government spending everywhere else. This approach, unsuccessful so far, sits as the only idea pursued by policymakers of all political stripes. The Euro appears as both a material constraint upon an uneven and diverse regional European economy and an obstacle to any kind of political experimentation in macro-economic governance.

Still no alternative to austerity

An interesting post on austerity over at the Economist’s Free Exchange blog. It makes the point that British business – generally in favour of austerity measures when they were first introduced back in 2010 – is now beginning to change its mind. It’s not difficult to work out why: Britain is facing a third quarterly decline in GDP, with a 0.5% contraction in the British economy expected for the second quarter of 2012. For the UK this is particularly galling given the fiscal boost of the Olympics and the expectation that this would mean a heady summer for at least some British businesses. Perhaps it is true that as many people left the UK as entered it for the Games, making the net effect close to zero.

The Economist’s post suggests that the tide is perhaps turning in the UK, with austerity giving way to a new consensus around pro-growth measures. It notes that Cameron’s government is considering an “economic regeneration bill” for the Autumn and that Boris Johnson – with an eye perhaps on the Tory leadership – is talking up the need for big government infrastructure projects (based around London, of course).

The difficulties faced by the UK economy should give food for thought to those arguing that the route to economic growth lies via an exit from the Eurozone. One might have expected the UK to boost competitiveness through cheapening its currency but – on the contrary – the British pound has become something of a safe haven for those with lots of cash. Life outside the Eurozone may mean currency flexibility and low borrowing costs but that isn’t helping the British economy. The debt burden for individuals and businesses, incurred in the heady pre-2008 years, is still depressing growth and holding back new investment plans.

The idea that the tide is turning at the level of elite opinion is difficult to substantiate. There were always voices calling for moderate fiscal stimulus alongside cuts in government spending. Back in 2010 the debate between the Tories and Labour was not about whether the government should drastically reduce spending – both agreed that it should – but it was all about timing. Shock treatment versus gradual reductions eased along via some discretionary spending. Austerity was the backdrop with the debate focused on how, not if. Little, it seems, has changed.

As noted on The Current Moment last week, the debate in the US presidential campaign is also about how the government’s deficit can be reduced, with both camps fighting over who is more credible in their deficit-cutting plans. In France, a government was elected with an ostensibly pro-growth agenda. In his campaign speeches, Hollande regularly fulminated against austerity politics, claiming he represented an alternative. And yet – bar the few measures introduced that are intended to put a little more money in people’s pockets – the real challenge for the Hollande government is the 2013 budget and finding the money to meet its balanced budget obligations. Much to the chagrin of the left of the Socialist Party, Hollande has signed off on the EU’s fiscal compact with little regard for the growth measures he had promised. Budget cuts will be financed in part via higher taxes but also via spending cuts. The Greek premier, Antonis Samara, is about to undertake a desperate trip to Paris and Berlin where he will ask for a bit more leeway in his efforts at balancing the Greek deficit. Merkel and Hollande are shifting all responsibility for the decision on whether to grant Greece an extension to the Troika, as if the issue was a technical one to be decided by accountants from the European Commission. From the US through to Europe, there is little evidence that the tide is turning.

Even though economies are stagnating under the burden of austerity measures, the intellectual case for an alternative still needs to made. Until then, it will be more of the same.

France’s Golden Rule

At the end of last week, France’s Constitutional Council announced that the recent European treaty on economic governance was in conformity with France’s Constitution. This avoided a complicated constitutional amendment procedure by which the European treaty would have been made compatible with French constitutional law. France’s president, François Hollande, is now freer to introduce the terms of the treaty by way of a simpler parliamentary procedure.

The reaction to the decision has been varied across the political spectrum. The far left has expressed its dismay at the imminent entry into law of a treaty they see as being far too focused on budget cuts and austerity, with little attention paid to growth. Having campaigned so firmly on the slogan of growth rather than austerity, the left of the Socialist Party feels the President has broken his promises. The right argues instead that the Constitutional Council’s decision means that the bite has been taken out of the treaty: rather than inscribing its terms into the constitution, the government is obliged merely by an ordinary law which it could in principle revoke. The famous “Golden Rule” by which governments would be obliged to aim for balanced budgets has been watered down. It is time for excessive spending Southern Mediterranean-style, claims the right.

The Constitutional Council’s decision is interesting for a number of reasons. Firstly, the attention and importance attached to this decision reflects the central role played by this institution in French politics. This has not always been the case but in recent decades, there has been a firm juridification of French political life, evident in the way political questions have been recast as legal matters (for a history of the Council, read Alec Stone Sweet). Secondly, in terms of the decision itself, the Council rightly argues that there is nothing in the treaty that violates in any absolute sense national sovereignty. This points to a broad trend in European integration today: new initiatives are predominantly undertaken in the form of agreements between national executives, with little by way of transfers of power to supranational bodies. The present treaty is no exception to this general rule and there is little in it which identifies how exactly the treaty rules will be policed. Thirdly, the Council also rightly argues that the adoption of constraining rules with regards to government spending – and macro-economic policymaking more generally – is in fact nothing new. It is a continuation of a trend already well-established in the 1990s with the introduction of the Maastricht criteria. And the French Constitution already contains within it an explicit orientation towards balanced budgets. Those opposing the treaty on the grounds that it violates national sovereignty are well over a decade behind.

This leaves us with is a key paradox. European treaties are the work of national executives and they do not empower supranational agents. But in substance they limit further the discretion that these national executives have to make policy. At the heart of Europe today we find national politicians who exercise their authority by binding themselves at the European level. The broader problem here is that rules – whether constitutionally enshrined or not – have replaced discretion as the basis for political decision-making. The political point at stake here is whether or not tigher controls on government spending will help or hinder a return to growth in Europe. And it is the difficulty national governments have in commanding the consent of their populations to the cuts they are envisaging which explains their preference for a collective, rule-based set of policies.

Capitalism under Hollande

In recent days, French president François Hollande has begun what is perhaps the most important aspect of this presidency, a reform of the French labour market and of capital-labour relations more generally. Typically, very general ideas about these changes were discussed during the presidential campaign but no firm commitments one way or the other were made by Hollande as candidate, not least for fear of angering the unions. Now that he commands a majority in the national parliament and is in a position to push through changes, we can see more clearly the social content of the Hollande presidency. Under conditions of crisis, and in the name of boosting French competitiveness, it is likely Hollande will do something similar to what Gerhard Schroder did in Germany, namely a flexibilisation of labour laws and a shift in the burden of funding social insurance from capital to labour. How hard Hollande will push is unclear but it does seem that history is repeating itself in France: as with Mitterrand, reforms hostile to labour are being undertaken by the left, not by the right.

His method and style are consensual and collaborative. In place of the immediacy and decrees typical of his predecessor, Hollande has organized a conference bringing together all the different representatives of business and labour in France. No firm commitments are to be made immediately. Rather, on key issues commissions have been set up that will discuss proposals and over the course of a year or so will come up concrete reforms. This contrasts also with Lionel Jospin, former socialist prime minister, who had angered business leaders back in 1997 by declaring at the end of a day of discussions the introduction of the controversial 35 hours week. Hollande’s approach is to keep everyone on board and introduce reforms only gradually.

Hollande may have attracted attention from outside of France as a socialist elected after a campaign where he declared “the world of finance” to be his enemy and where he proposed – remarkably off the cuff for such an important policy – to tax at 75% France’s highest earning individuals. But the reality of political change in France is elsewhere. Traditional leftwing parties, like the Front de Gauche, did far less well than many had expected, suggesting that the opportunity for reform à la Schroder has come in France. The form of his consultations is classically corporatist, with labour and business leaders fully represented in ongoing discussions with the state. As in Germany, the critical issue will be whether or not Hollande is able to secure the support of the unions to push through his proposed changes. The German government’s close relationship with the unions was what enabled the country to undertake its internal devaluation in the early 2000s, the source of its present day competitiveness. Keeping the unions on board, as well as the business groups, is essential for Hollande.

The actual substance of the changes is not yet certain but the ideas being floated make clear that the shift in the balance of forces within society is going against organized labour. One key possibility is that the cost of paying for social insurance, which in France lies heavily on business and is a clear legacy of postwar social democracy, may be increasingly levied on workers. This changes the balance between private wealth and public claims on that wealth. At present, there seems little by way of social mobilisation in France – or in the positions taken by unions – to suggest that such a shift will be resisted. The previous Sarkozy government had planned a similar shift but through an increase in VAT, the so-called social VAT, which unions had opposed unanimously. Hollande’s government is thinking instead in terms of raising what is called the CSG (contribution sociale generalise – a tax paid by all, used to finance health insurance, pensions, welfare payments to family etc.), a proposal that currently divides unions, some are in favour and some not. The CSG was already introduced back in 1990 as a way of generalizing the cost of social insurance which up until then had been levied uniquely on salaries and its extension today is in line with these earlier changes. The position of business is clear: unless such a move is made, competitiveness will continue to decline and jobs will be lost. With thousands of jobs in line to disappear as companies – from automobiles to big pharma – shed labour, the pressure on the government to lessen these costs on businesses is very high.

The situation in France is thus a confusing one. A superficial attack on business through capping of salaries in public sectors enterprises and levying a high tax rate for high-earning footballers and other stars, exists alongside a much more substantial reduction in claims the state makes on privately generated wealth. Social insurance, in France, is being transformed. From being something that belongs to society as a whole, and is based on a coercive transfer of wealth from the private to the public purse, it is now a good enjoyed by individuals and one that they need to pay for themselves. What is being given up here is the idea that markets generate systematic inequalities that should be righted through public intervention. From social insurance as a critique of capitalism to social insurance as a private good purchased by individuals through their own contributions. We aren’t there just yet but this is the direction in which France is heading.

End of austerity Europe ?

The victory of François Hollande in the second round of the French presidential election, combined with a very strong showing for the leftwing anti-EU bailout Syriza party in Greece, has led some to believe that austerity Europe is coming to an end. In France, some believe that Hollande’s victory has “strong echoes of 1981”: the year François Mitterrand was elected. The elections on the 6^th May were preceded by a series of reports suggesting that the austerity policies enshrined in the EU’s fiscal compact were increasingly seen as inadequate by those who had promoted them so vigorously only a year earlier. The head of the European Central Bank, Mario Draghi, made a speech to the European Parliament where he explicitly called for a growth component to be added to the fiscal agreement – a proposal that was already at the heart of Hollande’s electoral programme.

Though the election results are significant, it would be wrong to suggest that this signals any definitive shifting of political tides. Firstly, what the French and Greek elections demonstrate more than anything is the strength of anti-incumbency feeling in Europe. Sarkozy was the 11^th leader in Europe to lose his place at the head of government since the beginning of the economic and financial crisis of 2008. Anti-incumbency, however, is ideologically indeterminate. In Spain, it brought a rightwing party to power. In the UK it threw up an unhappy liberal-conservative coalition. In Greece, the election results point to a collapse in the basic contours of Greek political life but in a way that has swelled support for both the radical left and the radical right.

The dynamic is thus one of disintegration, with diverse ideological effects depending on the national circumstances. Current elections in Europe express frustration with existing governments more than the dawning of a new political moment. This was most evident in France: anti-Sarkozy feeling was the motif of the campaign. It was the building bloc for Hollande, who in many respects embodies the adage about “being in the right place at the right time”. And it galvanized an otherwise fissiparious left. The far left party, Front de Gauche, led by the charismatic Jean-Luc Mélenchon, told its supporters all to vote against Sarkozy in the second round. Mélenchon pointedly avoided mentioning the Socialist Party candidate by name. Much of the forward momentum for Hollande is thus really the flipside of a movement against Sarkozy. This suggests that Hollande may struggle to maintain momentum once he takes over the presidency and it makes the upcoming legislative elections much less of a shoe-in for the Socialists than we had come to expect.

A second reason is that there is no real intellectual alternative to austerity being pushed by these new leaders and parties. What might otherwise have been a great opportunity for genuine political renewal has in fact contributed little by way of new ideas. The socialist campaign in France was focused on Sarkozy’s record as president. Its own economic programme was far weaker. The main thrust was to halt reform at the domestic level, bringing things back to the status quo ante, and to kickstart growth at the European level by using the credit worthiness of Germany to fund a new round of government borrowing. Hollande himself did not contest the need for cuts in government spending, he merely disagreed on the timetable according to which the cuts should be made. What was left unaddressed was perhaps the major question of our time. Since the collapse of the postwar Keynesian consensus in the 1970s, European societies have relied on either public sector borrowing or on borrowing by private individuals in order to maintain their basic social contract. The crisis since 2008 has fundamentally challenged this model and yet no real alternative to it has emerged. New governments in Europe, including the French Socialists, are relying on yet more borrowing to promote growth. This is not the end of austerity Europe so much as a continuation of the underlying trends that brought about the crisis in the first place.

Yesterday’s elections continue the theme of anti-incumbency sentiment in Europe. They do not signal a fundamental ideological shift as ideas do not emerge, readymade, out of frustration or dissatisfaction with existing governments. Judging the new arrivals by this standard, rather than just celebrating the exit of chastened leaders, there is little reason to celebrate.