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MASSIVE BUDGET DEFICIT: Hollande's administration has barely any room to manoeuvre, and there is need for severe economic measures
THE face of French politics changed dramatically in May and June. First, after 17 years of centre-right presidents, François Hollande, a Socialist, was elected. Then, a month later, a centre-left majority took control of the National Assembly, too, after 10 years of right-wing domination.
Meanwhile, the Senate, the French Parliament's upper house, a conservative bastion between the two world wars and ever since, swung to a Socialist majority for the first time in history at the end of last year. The Socialists also control 20 of France's 22 regional governments, a majority of the presidencies of the Departments, and most cities with more than 30,000 inhabitants. In short, we are now witnessing a stunning concentration of power that is unprecedented in French republican history.
All of this occurred very peacefully, with no wave of triumphalism, or even much enthusiasm. Indeed, the abstention rate for a presidential election had never been higher before the contest between Hollande and Nicolas Sarkozy.
France's profound political shift reflects the persistence of the economic crisis that began in 2008. French electors did not vote for a dream. The Socialist Party's programme and its presidential candidate's campaign promises were considerably less ambitious than they were in 1981, when François Mitterrand was elected.
As a result, the campaign was quiet, almost cautious. Indeed, most candidates, notably Sarkozy and Hollande, might have been too cautious: the current crisis and possible future threats received little emphasis, which means that it may be difficult for Hollande to claim a mandate for any painful reforms that he will have to propose.
And now there is no escape from the difficult reality that the budget deficit remains massive, at more than four per cent of gross domestic product (GDP) last year. Except for creating 60,000 new jobs in education and restoring the right (rescinded under Sarkozy) to retire at 60 for roughly 200,000 individuals, Hollande's administration has barely any room to manoeuvre, and severe economic measures will have to be introduced in next year's budget.
Moreover, France's rapidly worsening foreign-trade deficit is boosting already-excessive debt levels, while output is falling and unemployment is rising. Unfit for modern markets, France's tax system actually stifles the country's businesses, reflected in a disturbing increase in bankruptcies among small and medium-size companies.
In such conditions, France urgently needs to restore and maintain economic growth, and should seek to coordinate its policies with those of other eurozone member countries. After all, because most of the eurozone's 17 member states suffer from heavy debt burdens, they are all anxious to find fiscally responsible ways to promote growth.
Unfortunately, the eurozone's institutions lack the powers needed to defend the monetary union effectively. Greek debt amounts to less than two per cent of European GDP. Had the European Central Bank been entitled to deploy enough firepower when the Greek crisis first erupted, the threat would have lasted only two hours. Instead, it took three weeks to grant the ECB only partial authorisation to act, causing speculation to take hold and spread to Portuguese, Spanish, and Italian debt, thereby jeopardising the euro's survival.
Removing the risk of a euro implosion -- which, given massive global imbalances, derivatives markets run amok, and the colossal scale of America's budget deficit, could catalyse a major international crash -- presupposes two fundamental changes in Europe. The first is political and involves sovereignty: full European solidarity can be achieved only through stronger fiscal and monetary federalism, which would enable the eurozone to act, despite minority dissent. Europe has succeeded in missing this goal for a half-century; now it has no choice but to shoot straight.
The second change involves economic doctrine. If markets self-correct, they do so only when defaults are registered and punished. But countries and their public services cannot default without inflicting severe pain on entire populations. Europe urgently needs an economic doctrine that, despite today's deficits, preserves funding for the investments and research that promote growth. Here, Germany's leaders, in particular, need convincing.
Hollande, backed by Spain and Italy, accomplished a small step in that direction at June's European Union summit, which endorsed the idea of a banking union. It is only the beginning, but Europe must start somewhere. So must France, whose concerns can be resolved solely within the EU -- and only if the EU carries out the essential political and economic changes that all its members need. Project Syndicate