After the French Elections: The Potential Benefits of Hollande

When Nicolas Sarkozy became French president in May 2007, hopes were high that this unconventional, anti-elitist dynamo would shake things up. Mr. Sarkozy indeed tried to tackle tough reforms.

But the French economy has not just treaded in place in Europe, but has fallen behind. It continues to live off its past glory and achievements, a legacy that is increasingly wearing thin. That is not good news for Europe and for the global economy, as French confidence does matter for Europe to move forward.

Which has us wondering: Could it be that the country might be in for a repeat of its transformative early 1980s experience? Based on that experience, if you want to see serious economic reforms implemented, you better hope for:

  a left-of-center politician being elected to office,

  a president who can rely on public support and sympathy,

  coming under pressure from the markets, and

  choosing to do the right thing in the medium- and long-term interest of the country — even if it is not (initially) in his or her own self-interest.

In 1981, following the reign of the very aristocratic Valéry Giscard d’Estaing, François Mitterrand, a socialist, was elected to the presidency.

Initially, he and his supporters were quite delirious about their newfound and long-desired power. Finally, here was a chance to remake the country and to make it work better for the working class. Mitterrand set about his task with full zeal by undertaking reforms such as nationalizing key firms, increasing the minimum wage, instating a 39-hour workweek, mandating workers receive five weeks of vacation per year and increasing taxes on the wealthy.

However, no sooner had he gotten going did he receive a vote of no confidence from the financial markets, as he was faced with devaluation, unwieldy trade and current-account deficits and capital flight. The message was clear: In terms of spreading the goodies, Monsieur le President had promised much more than his country could afford.

In fact, because of the fear very much present in previous decades of unruly workers either succumbing to the Communist virus or taking political power in France, business and government alike had offered considerable social benefits even in times of conservative leadership.

In other words, France’s workers were not exactly lacking in social benefits when Mr. Mitterrand took power. He and his supporters were just keen to push the pedal down further in order to cement the achievements of past decades and to round them out now according to their own designs.

Alas, it was not to be. His vision of promoting la vie en rose — a workers’ paradise steeped in fairness, ample benefits and rather leisurely work — burst quickly, thanks to the judgment of the financial markets. The government of neighboring Germany, which had been quite concerned that Mr. Mitterrand was causing France to live outside its means, was relieved.

In spring 1983, a new reality set in. Consolidation, cost saving and the promotion of government efficiency were to be key. Not exactly what an aspiring socialist do-gooder dreams of doing, but Mr. Mitterrand really had no choice. Otherwise, the interest payments on France’s debt would take up an ever larger share of public revenues.

Predictably enough, Mitterrand’s supporters were alternating among disbelief, furor and depression. Their hero had sold them out, or so they thought. Gruesome as the program sounded at the time, the economic effect was near magical. The French economy performed well — and Mr. Mitterrand established a precedent which, by now, may be the ruling norm in any large country on the European continent.

Mr. Mitterrand’s example of suppressing his own expansionary preferences was successfully replicated in Germany under another left-of-center chancellor, Gerhard Schroeder, who held office from 1998 to 2005. He implemented Agenda 2010, a tough program designed to cut back many of the traditional, but no longer affordable, social benefits that many people held dear.

The current performance of Germany — certainly no longer the “sick man” of Europe, as it was known as recently as 2005 — underscores the success of his courageous decisions. It is clear to most Germans that his reforms would have led to massive street protests, and would quite likely have been waylaid by those protesters — if they had been suggested by a chancellor from the conservative political camp.

Given all that, it becomes clear why one may argue that the arrival of another Socialist — François Hollande — in the office as French president may bring (relative) salvation to the country. Wouldn’t he try to fulfill overly generous electoral promises? He might try, but he knows that the markets these days are even quicker with their reactions.

Just in case Mr. Hollande plans to present a big social package, markets would effectively preclude it by letting interest rates rise even before the package is decided upon by the legislature.

France needs to reduce the public sector’s share of the country’s economy, the enormous headcount of the French bureaucracy, the still-stifling labor market regulations, the multi-layered surcharges on everything from taxes to wage and non-wage costs of employment — and to advance the devolution of economic activity into the regions. Paradoxically, that is the agenda to be tackled by a Socialist serving in the élysée.

Even more paradoxically, the odds are that this is the only way these measures will see the light of day. Such political buy-in is why all of Europe, and much of the world, has an abiding interest in a Socialist taking the reins in France come spring 2012. France is simply too important a factor in stimulating the European economy not to have one’s eyes firmly planted on that ball.

Editor’s note: This article is an updated version of Stephan Richter’s October 2011 analysis, which was published shortly after the Socialist Party picked Mr. Hollande as its candidate to challenge President Nicolas Sarkozy.