Thursday, January 10, 2013

Analysis - Hollande policy gaffes endanger French reform drive

By Catherine Bremer

PARIS (Reuters) - On the campaign trail, Francois Hollande pleased working-class voters with promises of a super-tax on millionaires and sought to reassure foreign investors with commitments to restore public finances and revive French industry.

France's President Francois Hollande waves to the crowd as he leaves Gaillon, near Rouen, after a visit, January 5, 2013. REUTERS/Charly Triballeau/Pool

But now as he starts 2013 and his eighth month as president, the Socialist's clumsy handling of those promises has turned the public mood against him, created the impression among many entrepreneurs that he is anti-business and prompted smirking foreign leaders to offer refuge to French tax exiles.

Although Hollande and his parliamentary allies can look forward to a four-year run before facing re-election, those policy and PR gaffes risk hobbling him just as he embarks on what could be the decisive phase of his five-year mandate, with plans to set in motion long talked about labour, welfare and pension reforms in the euro zone's second largest economy.

Mass protests in the streets have thwarted French presidents before, as have economic pressure and lobbying by business.

"He is struggling to explain the general sense of what he is doing. He needs to find a central message that is simple, credible and sounds like it will bring people benefits," said veteran political communications consultant Denis Pingaud.

From the very beginning of his mandate, Hollande has had to walk a narrow political tight rope. Investors had long viewed him warily, especially since he declared a year ago that the "world of finance" was his enemy; meanwhile ordinary voters are impatient to see promised improvements in living standards.

His image among business leaders was tarnished after his election by a leftist minister who threatened to expropriate a steel plant in the northern town of Florange and tell its Indian owner, Lakshmi Mittal, that he was persona non grata in France.

"Florange was a public relations disaster," said a leading French industrialist who argues Hollande's main problem is persuading people he has a coherent, workable strategy:

"Hollande needs to sort this out. As soon as you have a communications problem you have a political problem."

If business feels scorned, voters, too, feel let down, by a failure to tackle a jobs crisis and by the fact that his most emblematic promise, a 75-percent tax rate on income above 1 million euros ($1.3 million), has been ruled unconstitutional.

Long in the doldrums, Hollande's approval rating slid by a further four points in an Ifop opinion poll published this week to 37 percent. Another survey found three people in four doubt he can keep a promise to stem rising unemployment by end-2013.

Any one of the reforms expected this year could spark the kind of fierce street revolt faced by past governments trying to overhaul France's generous but costly welfare model.

Hollande faces the first mass street protest of his term this coming Sunday when up to half a million people are expected to march against his push to legalise gay marriage, a keynote social reform promise and one long cherished by the French left.

NEW PR CAMPAIGN

For now, a lack of low-risk alternatives means investors, especially in Asia, are still snapping up French sovereign debt, allowing Hollande the breathing space of cheap borrowing.

But the furore over his tax policies has turned France into an international laughing stock, with Britain and Belgium both offering refuge to entrepreneurs, and the leaders of Russia and Montenegro jostle to host tax-exile actor Gerard Depardieu.

Investment bank JP Morgan this week ranked concern about "disarray" in Hollande's strategy and loss of control of the domestic agenda second behind Italy's volatile politics in a list of 13 issues to watch for Europe this year.

"The communications failure is a serious one and it has pretty serious consequences," said JP Morgan economist Alex White. "He needs to somehow get ahead of all this."

Hollande's conciliatory manner, which he used to good effect to lead the fractious Socialist Party for a decade, could well work to his advantage in a government which must tread a path between pleasing left-wingers and financial markets.

Yet his technique of listening carefully to all sides before taking a decision, and giving ministers more autonomy than they had under his micromanaging, conservative predecessor Nicolas Sarkozy, can also make him appear weak and indecisive.

Aware of the problem, and mindful he may soon have to row back on over-ambitious economic growth and deficit targets for 2013, Hollande started work this week with a newly hired image consultant, a high-profile former television news presenter.

The government has also launched a global public relations drive called "Say Oui to France" that aims to flag reform plans to investors and offset negative talk about business in France.

But it may be no easy task to erase the stains and rebrand Hollande as a market-friendly reformer rather than the dithering Marxist painted by some foreigners: "There have been a lot of own goals," said JP Morgan's White.

"The danger is that some of them have been so serious that they kind of set the tone and are difficult to unpick."

FRENCH-BASHING

Negative headlines have masked some more popular moves, analysts say. Hollande's plan to slash corporate taxes to spur job creation won plaudits - briefly - before talk of it was largely drowned out by the commotion over the 75 percent tax and protectionist remarks by Industry Minister Arnaud Montebourg.

"The way Hollande manages, and the way conflicts are articulated within the government, looks bad. These are surface ripples but they are distracting from policies that are actually quite well-founded," said political economist Stefan Collignon.

Montebourg defended himself this week during a lunch with foreign journalists as the victim of bashing by pro-business media: "People should look at the facts, not the cliches," he said, arguing that France was an attractive place for companies to invest. "I want to fight this distortion."

After the legal setback on the 75 percent tax, which many said they should have foreseen, Hollande's team is redrafting legislation. But days after he ordered his cabinet in a New Year message to speak with one voice, his budget and finance ministers have sown further confusion by giving contradictory statements over whether the new, higher tax would be temporary.

Hollande's next PR challenge may be explaining why he over-estimated 2013 economic growth and possibly petitioning euro zone partners for an extra year to cut the deficit to 3 percent of output. His team is due to review by April a 2013 growth goal of 0.8 percent, which most economists see as way too ambitious.

While there are signs Brussels may give France some leeway on the deficit goal if it is making an effort to cut borrowing, Hollande will need to tread carefully in communicating any shift in economic targets and subsequent policy adjustments.

"Investors and business heads need visibility, stability and a clear government voice," said the leading industrialist, who spoke privately. "They don't want to hear Mr. X saying one thing in the morning and Mr. Y saying the opposite in the afternoon."

(Additional reporting by Nicholas Vinocur; Editing by Mark John and Alastair Macdonald)

News

Thursday, January 10, 2013

Analysis - Hollande policy gaffes endanger French reform drive

By Catherine Bremer