While tax cuts for the rich are being maintained, or expanded, across the Western world, France’s Socialist President François Hollande is doing something unthinkable: reducing the deficit by taxing the rich. And the Anglo-American business press and the “1%” are terrified the idea will spread.
France is a frightening nation these days. Across the Western world, newspapers and magazines warn of the threat posed by the country’s recently-elected Socialist president, François Hollande. Sometimes the most interesting thing about these critiques is the creativity of their form rather than their content.
There was The Economist, surely the most influential magazine of the Anglo-American elite, who warned us with the hit headline “The rather dangerous Monsieur Hollande”. Joseph Joffe, editor of the German newspaper Die Zeit and a good purveyor of conventional wisdom in the German Establishment, also warned of the French Socialist’s threat in an article in the Financial Times entitled “Hollande’s dangerous dream of exceptionalism”. Bloomberg accused Hollande of “lay[ing] a dodo bird egg with first budget”. They almost always seem to fall back on lazy stereotypes involving Gallic fantasy and/or extinct animals.
But my favorite was the fear expressed by the bombastic American billionaire Jeff Greene in a New York magazine profile that something like French or Latin American socialism might soon spread to the United States. If enough people keep economically missing out on the “American Dream,” he warned, “At some point, if we keep doing this, their numbers are going to keep swelling, it won’t be an Obama or a Romney. It will be a Hollande. A Chávez.” The proles are at the gates!
But what has Hollande done to merit these epithets? As a man who is not particularly charismatic, who has touted his “normalness” (in contrast with the excessively flashy and rich-loving previous president), and who sports an unattractive comb-over, he hardly appears the stereotype of the leftist radical. The man’s nickname in France is “Flamby” after all. We’re a long ways from the revolutionary energy and bombastic, subversive speeches of Fidel Castro or Hugo Chávez, or even, one might add, of Charles de Gaulle, France’s most “anti-American” president.
But Hollande’s moderate, “normal” image is also valid on substance as well. A first point, which will disappoint some leftists, is that Hollande is nothing like Chávez. The Socialist government has numerous points of continuity with the previous one: it follows the same Euro-American-Israeli line on the Middle East, and it continues to meet and cultivate ties with the leaders of various (mostly oil-rich) African and Middle Eastern dictatorships. The government has also faced criticism from the left for continuing to evict Roma (“gypsies”) and pledging to be tough on rioters (predominantly of Arab and black African origin). Hollande is no radical subversive of the Western world order.
At the same time, Hollande’s government has already shown signs of being one of the West’s most progressive in recent years. This has included reducing the retirement age for some workers back to 60 from 62, massively increasing the number of teachers (10,000 positions in education), recognizing the role of the French State in the wartime deportation of Jews (something the centre-right Jacques Chirac had done, but which the previous Socialist president, François Mitterrand, had refused), and planning to legalize gay marriage and adoption in 2013.
There is then a lot for people many political persuasions to be happy or upset about. But what really is “dangerous” to so many, is that France is going against the reigning orthodoxy on deficit-reduction and austerity. The government does not speak of “austerity” or “rigor” (both taboo words) but of “redressement dans la justice” (“recovery in justice”). This might seem like merely a bit of Orwellian wordplay, but it actually has meant a radically different approach. As the Irish Times wrote with barely-contained admiration:
Now Mr Hollande is also challenging that other piece of received wisdom, that fiscal responsibility must necessarily, predominantly involve spending cuts rather than tax increases. […] France faces difficult times. There is no pain-free road to fiscal responsibility and balanced budgets. But there are choices, and France has chosen its different path.
In short, Hollande has chosen to raise taxes on the rich rather than cut government spending on welfare, education or healthcare. The country’s 2012 budget relies almost entirely on tax increases to reduce the deficit, reaching €7.2 billion. This includes an increased wealth tax mostly on those with over €1.3 million in assets, an end to tax breaks for overtime work, an increase in the estate tax, a doubling of France’s tax on financial transactions, and increased taxes on oil stocks, CEOs’ “golden parachutes” and stock options. All this was tied to a significant if symbolic reduction of the president and prime minister’s salaries of 30%.
Hollande had campaigned on a pledge to increase the marginal tax rate for incomes over €1 million to 75% and more generally to make “finance” pay for the crisis. He has so far acted within the spirit of his mandate. The French elected a Socialist and, for better or for worse, that’s what they got.
Is France “anti-reality”?
According to many mainstream media, the French are simply going against basic economic theory or, put another way, what they call “reality”. Mark Steyn, a pseudo-libertarian/neoconservative Anglo-chauvinist author, wrote of the Socialists’ win in May: “François Hollande’s victory is a vote to postpone France’s and Europe’s reacquaintance with reality. Après moi, le delusion – yet again.”
Though Steyn is a radical right-winger, respectable “liberal-centrist” publications were in emphatic agreement with him. The Economist doubled-downed on its “dangerous Hollande” piece with an almost hysterical lead article in June entitled “Powerful as well as dangerous”. The gist can be gleaned from the subheadings: “Investors beware: François Hollande is set to take France in the wrong direction even faster than you feared” and “François v reality in 2012, as in 1981” (1981 being the year that François Mitterrand, the last Socialist president, came to power). The magazine was visibly alarmed at the idea of politicians doing what they say they will do:
[T]hose who hoped that the French president would swiftly dump his more outrageous campaign promises are in for a disappointment. Mr Hollande may be moderate by the standards of the French Socialist Party, but that is mainly because his party is unreconstructed.
It predicted that the “markets” would quickly bring France into line: “It has already been downgraded by one ratings agency. Nervous markets see France as more like Spain or Greece than Germany or Austria.”
Die Zeit editor Joffe also agreed with Steyn and made pronounced efforts to discredit the new French government in the Anglo-American business press. After his article in the Financial Times he pursued his attacks against Hollande in the op-ed pages of the Wall Street Journal in an article entitled “The European Revolt Against Reality”. He too drew a comparison with Mitterrand:
François Mitterrand enacted the very program Mr. Hollande has been hawking: buy now, pay later, tax forever. Two years later Mitterrand’s Socialist Party was drubbed in local elections, Saul turned into Paul and Mitterrand started preaching discipline and markets. This time, the Socialist president won’t even get his first 100 days. […] And if he doesn’t yield to reality? The markets will speak.
The consensus was clear.
“Socialist austerity” is working – so far
One can easily challenge the portrayal of Joffe and The Economist of Hollande’s government as one of economically-illiterate dinosaurs. First, the current French government is decidedly moderate and cannot really be compared with the truly “old school” Socialist-Communist coalition that took power in 1981. Second, the French Socialists have bowed to German preferences of sound money and budget discipline since at least 1983. They accepted that the European Central Bank’s policies should prioritize the fight against inflation over job creation and growth, as enshrined in the Treaty of Maastricht that created the European Union, and French public debt has almost perfectly shadowed German public debt. In addition, the Socialists had a previous stint in government under centre-right President Jacques Chirac from 1997 to 2002, where they showed a markedly pragmatic approach, which included the privatization of numerous State-owned companies.
But it is better to judge the Socialists’ critics based on their own predictions. Joffe said Hollande “won’t even get his first 100 days”. The Economist warned that he was on the verge of taking France “in the wrong direction even faster than you feared”. Both asserted that investors would flee the country and shadowy “markets” would bring it to heel.
In practice, this would mean that financial investors would stop lending money to France at reasonable interest rates, causing crisis, as has happened to Spain, Italy and Greece among others. Here the critics’ predictions have proven completely wrong. Investors, far from fleeing France, have seen it as a refuge, far more like the “core” (Benelux countries, Germany, Austria) than the suffering periphery. French borrowing costs on 10-year bonds have reached record lows of just over 2% and, as the Journal reported, France has joined Germany in having the privilege of investors buying its short-term debt at a negative yield (that is, investors are paying the French government to hold their money for them). The bond spread between France and Germany, the difference markets charge them to borrow, is now 0.6 percentage points, the lowest it has been in over a year.
Why is this? Perhaps partly herd mentality (once enough investors deem an investment “safe” others follow suit). Perhaps investors have calculated that, whatever happens to the rest of the eurozone, Germany and the European Central Bank will not let France fall.
But perhaps the most interesting explanation is simply that investors believe that the Socialists’ debt-reduction strategy of higher taxes in France and more pro-growth measures at the EU level has the best chance of working. After all, last April ratings agency Standard & Poor’s, not a leftist shop, cited excessively rapid, growth-killing deficit reduction as part of its reasoning for downgrading Spain’s credit rating:
[W]e believe front-loaded fiscal austerity in Spain will likely exacerbate the numerous risks to growth over the medium term, highlighting the importance of offsetting stimulus through labour market and structural reform.
And it goes without saying that making the rich pay for the crisis reduces the risk of anti-austerity protests and strikes within France, a sure way of undermining economic growth. In any case, it seems the “markets” are completely agnostic on the question of how the debt is repaid – whether through extra growth, budget cuts or tax hikes – so long as it looks like they will get their money back. Put another way: the markets trust Socialist France more than the opinion to be found in the pages of The Economist and the Wall Street Journal.
The hypocrisy of The Economist
France’s general economic performance is worth detailing. The mainstream media’s critique of the French economy is almost entirely based on its alleged underperformance. For The Economist specifically it is about its weak growth prospects, its debt and its “gaping trade deficit” (the amount which the country buys abroad more than it sells).
What are the facts? France’s trade deficit in the first half of 2012 was €36.1 billion, significant, but less than two-thirds Britain’s €60.9 billion. France’s public deficit in 2011 was equal to 5.3% of GDP (including 0.7% to bailout other eurozone countries) as against 8.3% for Britain (the U.S. and Japan’s deficits are even bigger). Total French public debt-to-GDP is the same size as Britain’s and significantly smaller than the U.S. and Japan’s.
France then has no reason to blush because of its economy. Yet, if France takes an alternative course, then The Economist break into condescension. The French are simply pigheadedly delusional, denying the obvious need to “liberalize” like Britain:
In the end Mr Hollande will meet reality, just as Mitterrand did. A weakened France has no alternative but to embrace structural reforms and liberalise its economy. And it will surely take less than the two years Mitterrand had before changing course. In the meantime a powerful President Hollande could wreak much damage on his country.
I have already detailed how woefully inferior the “liberalized” British economy is to the French one. But that isn’t the point here. The point is The Economist’s double standard. The latest official figures show that the British economy has been continuously shrinking over the last three quarters, while France’s has merely stagnated (not good, but still better). The discovery that Britain was sinking even deeper into recession, at an accelerated rate, prompted The Economist to publish a nuanced analysis on the merits of austerity vs. stimulus in fiscal policy:
Of the 20 economists who signed a letter to the Sunday Times newspaper backing immediate [British] austerity plans in February 2010, nine have retracted their original positions […].With global growth estimates worsening, it may be time to start looking for alternative measures. […] Perhaps a burst of infrastructure investment could give advanced economy businesses something more to build on.
In short, for The Economist: “France proposes tax hikes instead of spending cuts and ‘curbing the public sector’: What Gallic delusion! Britain sinks deeper into recession with public deficit over 50% bigger than France’s: Time for some stimulus and more deficit spending!” This double standard says a great deal about both the validity and the motivation of many of the Socialists’ critics.
Can “Hollandism” spread?
An understandable fear among 1-percenters and the “economic liberals” that speak in their name is that the French Socialists’ methods will spread. Voters across the Western world are liable to believe that it is better to put in power politicians who will tax the rich, making those who already enough to live decently pay more, before cutting education, unemployment benefits, healthcare, pensions and other public spending. There are already signs centre-left leaders across the West are waking up this electoral opportunity.
Last March, Labour leader Ed Miliband attacked the British government’s decision, in the face of record deficits and unprecedented austerity measures, to cut the top income tax rate from 50 to 45%. In July, perhaps inspired by the French example, Miliband proposed incredibly progressive tax plans: a tax on bankers’ bonuses and capital investment, and a temporary cut to consumption tax (the latter largely a tax cut for the lower and middle classes). These kinds of “anti-rich” ideas were virtually unthinkable in Tony Blair’s “New Labour”.
Similarly, with the new campaign President Barack Obama has rediscovered Candidate Barack Obama’s hatred of the Bush tax cuts for the wealthy. He has pledged to reject any bill that maintains those cuts for those earning over $250,000 per year, although given that he compromised with congressional Republicans on this very issue in 2010, some journalists were skeptical of the president’s sincerity.
In Germany, Der Spiegel reports that “the opposition center-left Social Democrats and environmentalist Greens want to copy France and apply new taxes to the wealthy to help reduce the national deficit.” They propose a 1% tax on assets in excess of €2 million, raising the tidy sum of €11.5 billion per year. Germany must hold federal elections by October 2013. It is far too soon to know the outcome but polls suggest a centre-left alliance could very well win and the current government’s free market Liberal allies (the FDP) might not even receive the minimum 5% of votes needed to gain representation in the Bundestag.
But perhaps most important will be how the Hollande model plays in Europe’s crisis-wracked periphery. Most of these countries – namely Ireland, Spain, Greece and Portugal – have relatively low tax-to-GDP ratios (in 2010 these were around 30-35%). In addition, many of these same countries (Spain, Portugal, Greece, Italy) are also those with among the biggest rich-poor income divides in the EU. In short, they have massive leeway to increase taxes, notably on the rich, before they begin to reach German levels (let alone Franco-Scandinavian levels).
It would be wrong to idealize Hollande and the French Socialist Party. They will, after all, need to find €33 billion in tax increases and spending cuts to reduce the deficit to 3% of GDP by next year, as demanded by binding European targets. The power vested in the French presidency and the massive majority the Socialists have in the National Assembly give them ample power and the possibility of “betraying” their campaign promises if they see fit. The French are also, however, notoriously good at keeping their governments on a short leash by taking to the streets.
So far, Hollande has invented “austerity for the rich,” and Western oligarchies beyond French borders are terrified that it might spread to them too. That is already something of a revolution and we could be seeing the first steps in reversing a consistent trend in Western countries since the 1980s towards more inequality and less real income for the majority. The great liberal intellectual Raymond Aron’s 1978 verdict on France still rings true: “This people, apparently tranquil, is still dangerous.”