Back To the Stone Age

I never believed Francois Hollande, Mister Nobody, had a shot at becoming president of France. Two days before the first round of the elections, however, I have to admit I was wrong. Sarkozy’s momentum in the polls has stalled. At this point, only a miracle can get him reelected.
The potential consequences of a Hollande victory are far reaching. The most damaging of these would be the end of a European union based on a French/German alliance. Angela snubbed Francois before the elections and this will not be forgotten. It is not that Ms. Merkel is mean or particularly fond of the outgoing president. She just does not want to have to deal with a new partner who rejects strict fiscal discipline.
From the foundation of the European community built by De Gaulle and Adenauer, progress in unification has always been dependent on its two core members. Giscard and Helmut Schmidt laid the groundwork of a European currency. Mitterand and Kohl let Jacques Delors build the common market with the free flow of goods, service, capital and people. Then Mitterand convinced Kohl to replace the Deutsche mark with the euro. Eventually Gerhard Schroder and Jacques Chirac managed to get along and not destroy what had been built by their predecessors. Angela Merkel then firmly took control of European events and got Sarkozy to admit German fiscal orthodoxy.
Monsieur Hollande is going to change that. He wants to bring France back to Francois Mitterand’s early policies of profligacy. It will not go over well in Berlin.
Here are some of the changes that are coming to France.
The marginal income tax rate will reach 75% above 1 million euros of revenues. A new bracket at 45% will also be added to people making between 150,000 and 1 million euros. On top of that, Mr Hollande plans to add a tax on “financial income”, by which he means investment income. Like Sarkozy, he wants to levy a minimum tax on revenues people living abroad. They have both noticed that overtaxed French people tend to move to Brussels, which is conveniently close to their beloved Paris.
Corporate profits are also to be milked, but the socialist candidate makes a distinction between good and bad companies. Small companies are good. But once they become too large (a threshold yet to be defined), he wants to tax them more. Entrepreneurs now know that a little bit of ambition is OK. Too much ambition is going to be punished. Expect the CAC 40 companies’ profits to be taxed at more than 33% in the near future. It suits the French to take back the number one global position from the Americans in corporate tax rate.
The French government’s expenditures already account for 56% of GDP. But that does not seem enough to Hollande. He wants to hire 60,000 new teachers and he wants to subsidize companies to hire 150,000 young workers. Other measures include raising the minimum wage, loading more price regulation onto the housing market, and increasing the mandatory share of social housing in any new development to 25%. He also wants to prohibit LBOs on the grounds that they harm workers. He has not yet openly agreed with his friend Melanchon to go back to strict enforcement of the 35 hour work week. That is to be announced after the elections.
Election promises being what they are, Monsieur Hollande is a bit vague on how he will do all this while balancing the budget by 2017. One thing is for sure: he does not want foreigners’ money. He will tap French savings instead. He will issue bonds available to French citizens only, which is not a new idea (none of Hollande’s are new). Nicolas Sarkozy abandoned this nonsense when he realized that he would have to pay much higher interest rates.
We are heading for rocky markets in France and Europe.

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