French President Hollande’s first press conference November 13th, 2012

by Véronique Queffélec on novembre 15, 2012

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French President François Hollande gave today his first Press Conference since his election. He felt that he must respond to the deteriorating economic situation and the increasing pressure being exerted from Germany on the need to reform.

The President did not announce new measures but used the press conference to clarify his message of reforms within a framework of “social justice”.

A) Internal and external pressure to restore competitiveness

An obvious-denied competitiveness discord between Paris and Berlin

The Government is under pressure to deliver a clearer message about what it tends to do with respect to competitiveness. German officials suggested on Friday that German Finance Minister Schäuble had asked the Council of Economic Advisers to the German Government to consider drafting a report on what France should do. One source suggested that if it decided to do a study, it would likely do so in cooperation with a French institute, while German FinMin spokeswoman Kothe denied such a request. She noted that “we are confident, the French government has always expressed that they will meet the European requirements of the stability and growth pact”.

On the French side, Finance Minister Moscovici attempted to defuse the tensions between Paris and Berlin on this subject. He stressed that there cannot be a misunderstanding between France and Germany, indicating that “our economies are so linked and interconnected, and their joint dynamism so necessary for Europe, that this misunderstanding amounts to a storm in a tea cup“. He insisted that that Paris-Berlin relationship was good. French PM Ayrault noted on Friday that “we are constantly communicating with them [Germans] and I will be in Berlin next week to meet Mrs. Merkel, and just before that, I will have spoken with Mr. Schäuble”. Yet, the French Treasury is reported to have sent a letter to Berlin asking for some explanations about the allegations that German Government had commissioned a report on French competitiveness.

This is clearly a sensitive topic for the French administration, with the Government’s proposal to improve firms’ competitiveness through the use of €20 billion of tax credits to be debated in parliament in early 2013. The good news is that some kind of peer pressure seems to be working, with the Government aware that further progress on labour market reform and some changes to the financing of the French social security system will have to be delivered in the coming months.

French employees willing to make concessions to avoid job losses

A poll by IPSOS for Le Figaro found that a large majority of French employees would be willing to make “strong concessions” in order to avoid significant layoffs in their firm. 64% of the respondents would accept an end to the 35-hour working week directive, 59% would consider a freeze in their pay and 54% would enter a “partial unemployment scheme”. However, only 32% of respondents would be in favour of a cut in their wages. 61% of respondents believe that they will one day be confronted with the risk of being unemployed. The poll also revealed a high degree of pessimism from business leaders, with 43% expecting economic activity to decline over the next six months, with one in five expecting having to announce some redundancies in the coming months.

This poll illustrates that there is perhaps a greater willingness for additional flexibility in the labour market than the Government is willing to acknowledge. The country is perhaps more ready to accept some additional reforms to the labour market, recognising that the current still relatively rigid framework is creating too much unemployment.

B) Press Conference: Main Outcomes

An opportunity to face unpopularity

French President François Hollande gave his first press conference six months after his election. This was an important opportunity for the President to pass a message that Government policy is coherent and win back some support by arguing that these reforms and adjustments are necessary ingredients in tackling the crisis.

Although various polls suggest that his popularity is stabilising, with between 39% to 44% of positive opinions, this fall from grace within such a short period is unprecedented. Asked what they believe are the most likely drivers of the President’s popularity collapse, 31% of French voters point to tax increases, 27% to the economic and social crisis and 26% to the lack of solutions commensurate to the challenge at hand.

Three major Challenges

President Hollande started his conference by stating : “I understand the worries of the French in the face of crisis,” outlining “three major challenges - the reorientation of Europe, reducing French debt and improving competitiveness.”

On Europe

Europe needs growth alongside deficit cut plans “I am for a multi-speed Europe. I am in favour of the Eurozone developing its own structures… perhaps with its own budget, its own energy policy … We have to move forward. The status quo would be the worst thing for Europe today.”

Hollande says Greece deserves next aid tranche

“The Greek parliament has just adopted a very tough plan. Greece expects in return the support of Europe and of the IMF. It was promised this support, and I believe that beyond finalising any technical modalities, it is entitled to this support, to put an end to what may have been a doubt about the integrity of the euro zone.” Hollande stressed that Europe should find solutions to provide Greece with the €31 billion it needs without challenging the French and German principles.

Relations with Germany

He denied the allegations on the report commissioned by the German Government on French reform policies’ credibility. “Firstly there are rumours and confidences that are not confirmed,” he said. “The reality is that the Chancellor and I have a common responsibility to move Europe forward. That’s the role history has assigned us, also due to the size of the economies we represent.”

Hollande highlighted the difference of priorities that stand between his president status and Merkel’s electoral position: “Nothing should be done to weaken that relationship, so that beyond our differences - and I can confirm that there are some - we can find a compromise each time in the interest of Europe and of our two countries.” He added: “We speak to each other frankly, the Chancellor and I, but we don’t teach each other lessons because Franco-German relations aren’t based on lessons, except perhaps on the lessons of history.

“We in France more than others have to prove our seriousness and our competitiveness, more than Germany, and that’s what we are doing. And Germany… has to prove its solidarity, which is not easy when a country has made such an effort to become what it is today.”

Deficit reduction

Hollande says France will stick to 3% deficit target, despite a 0,4 point gap between the Government and the IMF’s GDP growth forecasts for 2013 (0,8 vs. 0,4) and a fragile relationship with financial market: “Among Europeans, we should ask ourselves the question: what should be the pace (of deficit reduction). There again, I am not going to take a risk for France. I’m not going to say that because the 3% target is difficult, it doesn’t matter if we get attacked on the markets. Some people would love to see that happen though.”

Public debt

Hollande said he wanted to reduce public debt by €50 billion over the next five years : “I’ve made the decision to force the pace, to bring France out of debt and to balance the public accounts,” he said. “We should be able to do much better as a country with lower public spending.”

Reducing public spending, which risks putting the Government at odds with the country’s powerful trade unions, was just the first step, he said. The next was to improve the competitiveness of French industry and to restore the country’s economy.

Restruturing VAT rates

Hollande denied charges of a policy reversal and defended his decision to raise VAT, despite having criticized the former president for a similar increase, which the Socialists had overturned. While voters fear modest households will be hurt by the forthcoming tax rises, Hollande said VAT would be raised by only 0.4% (from 19,6 to 20%), and not until 2014. Hollande insisted, however, that France’s restaurant would be spared “once and for all” and that their VAT would remain fixed at 10%. He added that basic items would benefit from a 0,5% tax reduction in an effort to cushion the poorest households

Tax credit for research spending

Hollande said that the idea is to negotiate with social partners in order to find efficient solutions.

Unemployment

“We are going to have a continuous increase in unemployment for a year. That will be hard on families, on companies… we’ll do everything so that at the end of the year 2013 we can turn the unemployment curve around.” He mentioned the “generation contracts” (that encourage companies to hire younger workers), the « competitiveness pact » and the negociation with social partners as solutions against unemployment in the long run.

On labour market reform

He called on trade unions and employers to “negotiate and conclude a historic compromise” to reform labour contracts to boost employment, saying the Government would legislate if they failed to reach a deal but he would prefer to turn an agreement reached through negotiations into law.

Companies

Hollande said a move to fund tax rebates for companies with small rises in sales tax should bolster output while preserving consumer spending: the Government has earlier announced tax breaks worth up to €20 billion a year aimed at offsetting high payroll taxes that have dulled the competitive edge of French companies.

On planned bank reform

“We need banks that are at the service of companies, of the economy, of housing.”

“This reform will separate deposit and lending activities, which the French people know well and find reassuring, from those activities connected with speculation, which scare them. It will also outlaw toxic (financial) products and will bring order to remuneration schemes such as bonuses.”

Shale gas

Hollande renewed the ban on shale gas exploration through hydraulic fracturing even though France is believed to harbor one of the biggest shale gas reserves in Europe. He said « secure technology must be found before the launch of any activity in this sector. The research must continue »

On Syria, France becomes first European nation to back opposition group

France broke ranks with its European allies by officially recognising Syria’s new opposition coalition and said it would consider arming the rebels once they created a government in waiting. Hollande said : “I announce today that France recognises the Syrian National Council as the sole legitimate representative of the Syrian people and as the future Government of a democratic Syria making it possible to bring an end to Bashar al-Assad’s regime … On the question of weapons deliveries, France did not support it as long as it wasn’t clear where these weapons went.”

On his policy, public opinion and financial markets

Hollande repeatedly described himself as “responsible”, distancing himself from the “Mr. Normal” status he adopted during his campaign.

“My goal is simple: to revive growth and reduce unemployment and those are the only criteria I want to be judged on,” he said. Hollande said he would not be swayed from his goal by gloomy public opinion and urged French voters to judge him on his long-term success. To respond to attack coming from his unpopularity highlighted by the recent polls he declared: “I can understand the doubts that have been expressed. The only valid question in my eyes is not the state of public opinion today but the state of France in five years’ time … Over the last six months, I’ve made my decisions and I stick to them without having to make any kind of U-turn or backtracking, because these decisions are in line with my (campaign) commitments, with my principles and above all with the interests of France.”

He expressed no fear about France’s credibility in financial markets, stressing that low French bond yields showed that markets believed his economic policies were credible: “The interest rates on our public debt are the lowest in our history.”