As talks with German Chancellor Angela Merkel draw close, Zach and Labib take a look at the new French President and give their own predictions about his time in office. More specifically, how will the new French President’s economic plans alleviate economic pains in the Eurozone?
NO TO KEYNESIAN PRINCIPLES
By Jonathan Labib
The results of the French Presidential election are in; the center-right incumbent Nicolas Sarkozy was defeated by socialist challenger Francois Hollande. I don’t blame the French electorate for throwing Sarkozy out of office; he failed to deliver on his campaign promise of revitalizing the French economy. I do however think that electing a socialist candidate who plans on restoring economic growth by raising taxes to crushingly high levels and expanding the already massive French state isn’t the answer either.
One of Hollande’s major economic platforms that he ran on is raising the marginal income tax rate on French millionaires to a staggering 75%. The wealthy, such as French millionaires, are able to move around the world to escape such onerously high tax rates. A country with such a high tax rate is uncompetitive compared to other countries with lower tax rates. Many French high income earners will probably leave the country if such a punitive tax is levied to protect their assets. If a French businessman is presented the choice of paying a 35% marginal tax rate in America as opposed to a 75% tax rate in France, the choice seems clear, at least in my opinion. A 75% tax rate will kill investment by causing massive amounts of capital to flee the country. Raising taxes can sometimes lead to an increase in revenue for the state, but not when they are raised to absurd levels.
Speaking of the state, the French state already controls 56% of French GDP. For comparisons sake many American’s feel that the American government controls too much of the American economy at around 25% of GDP. Hollande plans to jump-start the French economy by promoting growth over austerity. Unfortunately Hollande’s idea of growth is inflating the already bloated French state via increases in government spending. France’s government spending is already above levels that are thought to have deleterious effects on a countries economy, a major increase in spending will most likely further crowd-out the struggling private sector. France’s debt is also an issue, as it is already at 90% of GDP. A massive increase in tax rates and government spending will inevitably increase the French debt problem, much to the chagrin of the European bond and stock markets.
The answer to France’s economic woes isn’t massive Keynesian stimulus and confiscatory tax rates, but instead to enact meaningful structural reforms that will make France more competitive in the global marketplace. Such reforms would include raising the retirement age, loosening labor laws, lowering government spending to reduce bureaucracy, getting rid of unnecessary regulation, and keeping taxes at competitive levels. Hopefully the fiscal pact that France signed upon joining the EU will preclude it from doing anything reckless economically. France has the choice to become more like Greece or more like Germany, for the sake of the French people they should opt for the latter.
WHY HOLLANDE IS GOOD FOR EUROPE
By Zach Goldaber
François Hollande’s election as President of France shows that the French people have a strong desire for a new blood and new answers in the search to save the French and European economies. Frankly, his solutions just might work.
Hollande is something of a French Barack Obama in that he campaigned on the issue of change and unity. Despite the inroads that he made in making France more of a player on the international scene, outgoing President Sarkozy left France a socially fractured and more divided nation internally. In particular, Sarkozy drew a great deal of flak for courting the far-right nationalist party Front National, further bringing to the forefront contentious questions about immigration, racism, and the economic disparities that plague the nation.
His ousting indicates that the French people want unity, not separation. In the New York Times marketing professional Sebastian Mondat summed up how many of the French people feel about the president-elect: “I found that Hollande had the power to bring people together,” he said. “The right was compelled to take up its traditional topics, creating tension among people.”While not an especially charismatic figure, Mr. Hollande has rightly recognized that desire for an end to the tension and seized upon it.
Many take issue with Hollande’s opposition to austerity measures as a means of fixing the European economy. Hollande supporters have rightly pointed out that austerity measures have thus far solved nothing, and that there have been eighteen months of economic chaos in the Eurozone. The citizens of Greece spoke out against austerity measures in droves last Sunday by rejecting the two leading political parties there, and now the French have done the same. Hollande offers a gleam of hope in a bleak landscape where nothing seems to be working.
There are potential problems, of course. With Germany standing tall as the gorilla in the EU, Hollande must come to some kind of middle ground with Angela Merkel and the German government. He almost assuredly shall, but in the process Merkel will likely have to compromise on her strong pro-austerity stance to some degree. Germany, for all its might, cannot act effectively without the support of nations like France and Britain. Hollande’s installment thus represents a positive measure on that end. He is certainly a step up over Sarkozy, who looked like Merkel’s French hand puppet at times.
His taxation policies – Hollande favors raising the tax rate to 75% on those making over a million euros and wants to raise the corporate tax rate as well – have been cited as policies that might drive business out of France and greatly damage its economy. While Hollande is a socialist, he is not an idiot. He undoubtedly realizes the importance of keeping jobs and money in France, and has some awareness of the concept of fiscal responsibility. His economic plan, in fact, calls for balancing the French budget by 2017 and creating economic incentives that will put 60,000 more teachers in the French school system. When tested, Hollande may show an astonishing capability for sensibility and moderation.
This is undoubtedly what the French people expect. Hollande got his start working for François Mitterrand, the first Socialist French president. No one gave Mitterrand a chance in the polls, and as Hollande put it himself, “they used to call him badly dressed, old, archaic, he knows nothing about the economy!” Mitterrand shocked Europe, however, and went on to successfully govern France through the shaky economic era of the early ‘80s and remained in office for 15 years. Today he is broadly adored by the French public as a man who had a remarkable capacity to adapt to the times and climate and govern well. It does not seem like a stretch to believe that history might well repeat itself during the presidency of Mr. Hollande.