France: A Quiet, Bold Coup d'Etat

Published on August 26, 2014

Barely five months after succeeding the battered Jean-Francois Ayrault, French Prime Minister Manuel Valls resigned early yesterday morning, only to be immediately “reappointed” in theatric fashion and instructed by President Francois Hollande to form a new Cabinet.

Under normal circumstance the President and Prime Minister could have opted for a less disruptive cabinet reshuffle rather than go through a full government resignation to counter political attacks undermining their economic platform and policies. But the culmination of those  attacks in snarky public broadsides against “absurd austerity policies” by Minister of Industrial Renewal Arnaud Montebourg, who comes from the leftist faction of Hollande’s own Socialist Party.

Valls has just presented a new cabinet to Hollande, and all eyes will be on Paris now to see whether Hollande over the next few months will be able to salvage the remainder of his tenure and economic policies, or whether the Montebourg revolt will mark the beginning of an early end to his embattled presidency.

*** The Hollande era, however, is effectively over.  With polling numbers at a dismal 17%, the lowest ever since the Fifth Republic was formed in 1958, Hollande has now turned into a lame duck if not liability to his party, and from what we understand based on discussions with French political sources, Valls, as his potential successor, has for all practical purposes taken over the reins of government. We are told that the decision to dissolve was in fact made by Valls while Hollande was in Brittany, and that while normally the PM, when from the same party, consults closely with the President on his cabinet nominees,  Valls was now informing more than consulting with Hollande on appointments. ***

*** With a political future that is still very much alive and a great deal more at stake than the embattled Hollande, Valls’ this “soft coup” is good news for reform. Valls has made his center-left policies and political position clear in no uncertain terms, and will in effect double down now in following through and implementing at least the broad outlines of the currently proposed tax and spending cuts. He will from here on own the economic policy and any recovery in the stagnant French economy that ensues, with Hollande relegated to the role of figurehead, despite his more powerful position on paper. ***

*** The real test will of course come in October, when the government presents its budget to parliament for a vote, and the concern is that with a slim majority and fragile coalition the budget may fail to pass, throwing the country into political chaos. Those stakes are even higher as, from what we understand, Valls intends to put the budget to the vote simultaneously as a “49-3” Confidence Vote on the government as well. The “Frondistes” left wing parliamentarians may balk when push comes to shove at bringing down their own government, but the impact of street demonstrations, strikes, and populist pressure will be hard to predict. Nevertheless we do expect at this point for the budget to pass, and in a worst case scenario, under France’s constitutional system, the government will not “shut down,” but simply continue on the previous year’s budget if there is no budget agreement, until one is found. ***

Doubling Down

Valls was expected to announce today a cabinet that could include some new and less known faces, including members of the Green and Radical party, along with some well-known Socialist Party names as speculated by the press. As the economy and Hollande’s ratings have faltered, the government’s parliamentary coalition has been shrinking alongside, with the cohesion within the Socialist party itself, and Valls was expected to look to rebuild some support from these smaller parties with an eye to the all-important upcoming budget vote in October.

The Greens left the governing coalition before the European Parliamentary elections in what turned out to be a futile attempt to gain MEP seats by distancing themselves from Hollande. They had appeared to be more than willing to come back in on an opportunistic basis. And the Radical Left, despite its scary sounding name, is more radical in its social than in its economic policies.

That Valls has, however, chosen to proceed without relying on the Greens, and that he replaced Montebourg as Economy Minister with Emmanuel Macron, a clear centrist, is a clear testament to his “double down” policy. And for all the far-left political and populist criticism of his bowing to “German policies,” he may even receive some unexpected economic help from Frankfurt, Berlin and Brussels.

Support from Abroad

Under threat from the populist right and left, Valls and Hollande will need to handle their politically charged relationship with Berlin and Brussels delicately. But German Chancellor Angela Merkel is for one understood to be quietly supportive of Paris’ budgetary efforts, at least when compared to the alternative of an early election that could result in greater inroads for Marine Le Pen’s far right National Front.  And even Brussels may not prove to be the austerity demon painted by the hard right and left.

EU countries are required to present their budgets to the European Commission for approval by October 15, and all eyes will be on negotiations over meeting the dreaded 3% deficit to GDP targets. But the Commission is expected to adopt a clearly more lenient approach in its budgetary scrutiny. There will be tolerance of an increase in longer term spending under “investment” programs – a cornerstone of the political agreement behind Jean-Claude Juncker’s appointment as President – and it appears that there could even be a Commissioner post solely devoted to “investment programs.”  This will also be the first year of the adoption of the new ESA 2010 accounting rules that will boost GDP numbers.

The new ESA rules establish – among other things – the capitalization of R&D and of military expenditures, and include the controversial inclusion in GDP data of estimated revenues from illegal activities (insert your own Italy joke here). According to Eurostat estimates from January this year, that should result in an (artificial) increase in EU GDP in the order of magnitude of around 2.4%. While that won’t affect actual growth, it will change the Stability and Growth Pact measurements, with the more benevolent numbers allowing more leeway for more spending.

Finally, as evidenced in ECB President Mario Draghi’s speech last week in Jackson Hole, the European Central Bank is for its part in full support of expansionary fiscal policies complementing its commitment to extreme monetary accommodation so long as there is an appropriate balance of spending targeted on productive investments, budget discipline, and tax cuts (See SGH 8/21/14, “ECB: Draghi in Jackson”). Without getting into national politics, that would presumably include support for Hollande’s “austerity” budget that is comprised of 40 billion Euros in tax cuts and 50 billion Euros of spending cuts over three years.

There will of course be plenty of pressure for keeping Hollande’s feet to the fire. With French growth faltering at recessionary levels, Hollande recently announced he would disregard even a modified target for the 2014 deficit (which was supposed to be an already revised 3.8% of the GDP this year, and instead will go beyond 4%), in apparent defiance to the EU budgetary rules. In reality, the chances that Brussels will do something about it – besides another warning – is slim.

The French budgetary procedure started in July, with the government drafting and submitting it to the “Conseil d’état” for constitutionality screening. After September (on the first Tuesday in October) it is scrutinized and voted by Parliament, which has until December 31 for final approval. That is bound to be a contentious process.

Political Whirlwinds at Home

Deep divisions and battles within the Socialist Party over austerity and the more centrist-oriented economic policies of the Hollande government are not new, and had everything to do with the downfall of Ayrault in the spring of this year. Indeed, we had warned of a possible political crisis as a result of those divisions in France by this time as the budget take shape back in May (see SGH 5/22/14, “Europe: A Roadmap for Elections Weekend”).

And last week at a meeting of the “Frondistes” leftist faction in Burgundy (“La Fete de la Rose” – the Rose Celebration), then Minister for Education Benoit Hamon foreshadowed Montebourg with a strongly worded speech railing against the government’s austere economic policies. That was of course followed by the now famous comments from Montebourg himself bashing German Chancellor Angela Merkel and the German-imposed austerity in a thinly veiled attack on his own government and President.

Our understanding is that it was in fact Martine Aubry, mayor of Lille, who led the revolt from outside of government, and not Montebourg. Montebourg is not technically a Frondiste, and now, stripped of his power, may have overplayed his hand and be relegated, at least for now, to a back seat in local government.

And the real threat to political stability lies not in the opposition, but within the Socialist party itself, and whether the left will choose to bring down its own party over the budget. We do not think they will. Divisions may however come to a head later in December when the Socialist Party holds its annual Congress.

Technically speaking, the “49-3” under which Valls puts the budget to a vote we are told is a “Confidence Vote,” not a “No-Confidence Vote.” That means in case the government fails to get a majority, it can remain in place so long as it shows there was no majority voting against either – at least technically speaking.

Perhaps more to the point, a realignment of the electoral schedule in France placing the parliamentary vote two months after Presidential elections has in effect put delegates in a far more vulnerable position to any national mood swing or electoral “sweep” behind a Presidential candidate. That elevates the importance of the success or failure of the current leadership to the future political longevity of delegates, and will ultimately weigh deep on the minds of delegates as they vote on the budget and on whether to support their party leadership or go into open rebellion.

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