To search for efficacy and coherence in the economic policy conducted by France's President Francois Hollande and Prime Minister Jean-Marc Ayrault has become an arduous if not fruitless task. Welcome to 21st century France, where daily headlines detailing dismal employment numbers, factory closures and redundancy plans are edged out only by cases of government muddling and backpedaling.
President Hollande's woes stem, to a large extent, from the difficulty in reconciling his commitment to reduce by 2015 the public deficit to three percent of GDP with the pressure exerted by his political base to maintain France's profligate welfare state -- and an overall public spending that absorbs 57 percent of GDP (the highest ratio, along with Denmark, in the Eurozone).
Constrained by these political parameters, President Hollande and his prime minister have tried to shave France's public deficit by lavishly raising taxes and creating all kinds of new levies.
But then, confronted with the massive discontent that such measures have provoked among firms, farmers and households, the government has been obliged to backpedal and even capitulate on multiple occasions.
President Hollande recently gave the impression that he understood the malaise France is stuck in when, in August of this year, he announced a "fiscal pause" (a standstill on taxes) for 2014. In September, he went further and promised that there would be "no more tax increases" apart from those already in the pipeline.
The commitment proved to be short-lived. Prime Minister Jean-Marc Ayrault corrected the president by stating that, in fact, the "fiscal pause" would have to wait until 2015. What's more, a new tax hike -- retroactive to 1997 -- was imposed on household savings, while a pro-environment levy on road transportation (ecotax) was programed to be collected as of January 1, 2014.
These new measures gave rise to large-scale protests that forced the government to backpedal in both cases.
The cocktail of tax increases and policy climbdowns has brought about an environment characterized by fiscal instability and economic uncertainty. Not surprisingly, firms are reluctant to invest and hire as they fret the arrival at any moment of a new fiscal blow that would damage their profitability.
Reflecting the current funk among entrepreneurs, a survey commissioned by the American Chamber of Commerce in France, released last October, indicates that only 13 percent of U.S. firms operating in France have a positive perception of France's economic outlook, down from 56 percent in 2011. Likewise, France fell from 34th to 38th place in the latest World Bank ranking of the most attractive countries in which to do business.
For sure, the predicament of the French economy antedates Francois Hollande's tenure. Yet, the current tax spree and the ensuing policy insecurity have made things worse. This explains why Standard & Poor's has just downgraded France's government debt (the second time in less than two years) on the grounds that the country's fiscal flexibility is "constrained by successive governments' moves to increase already high tax levels, and what we see as the government's inability to significantly reduce total government spending."
Playing the contrarian, Nobel laureate and New York Times columnist Paul Krugman recently came to the defense of Francois Hollande's economic policy by asserting that the S&P's downgrading was "much more about ideology than about defensible economic analysis."
French authorities, however, would be well advised not to place their bets on his support. Indeed, Mr. Krugman's policy judgment on European economies has been far from infallible, as documented in a recent article published by Anders Aslund of the Peterson Institute for International Economics.
No less disquieting, in May 2012 Krugman endorsed the view that Argentina was a "remarkable success story" and derided articles presenting a "negative" image of that country -- much in the manner that he now scorns S&P's downgrading of France's sovereign debt. To judge from the contradiction between Krugman's praise and the present disarray of the Argentinian economy, French policy makers should have reason to worry, rather than rejoice, about his support.
Be that as it may, France's fiscal zigzag is not only penalizing firms' investment and hiring, it is also encouraging social revolt. A confidential note recently prepared by the country's prefects (i.e. the high-ranking civil servants who represent the state at the regional level) expressed concern over the specter of "fiscal disobedience" nationwide.
Socialist MPs and local leaders, and even government members, try publicly to distance themselves from the tax hikes -- if only to preserve their chances to win or keep a seat in forthcoming elections.
With Hollande beating records of unpopularity (his approval rating is at 21 percent, the lowest ever for an elected president in France), many in his camp are pressing him to disregard the objective of reducing the public deficit and utilize instead the public spending lever.
The problem is that financial markets would not fail in such a case to raise the interest rates charged on French government bonds. This, in turn, would oblige the government to either increase taxes further or cut public spending, or both. Back, in other words, to square one.
A more sound option for President Hollande would be to emulate former German Chancellor Gerhard Schroeder, a Social Democrat like him, who introduced structural, supply-side reforms (labor-market liberalization, public spending cuts and tax reductions) that led to the restoration of Germany's competitiveness and to an improvement of that country's public accounts.
This course of action, however, poses major problems for Hollande. Schroeder and his party, the SPD, lost the national elections held after the introduction of those reforms; and Hollande, who is to seek reelection in 2017, would abhor enduring a similar setback. Moreover, it is far from certain that large segments of Hollande's party, and of France's Left in general, would endorse such a policy U-turn.
For all these reasons, prevarication, fiscal tinkering and dismal economic news appear to have a long life ahead in France.