France's future

A country in denial

By ignoring their country’s economic problems, France’s politicians are making it far harder to tackle them


Mar 31st 2012

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VISIT the euro zone and you will be invigorated by gusts of reform. The “Save Italyplan has done enough for Mario Monti, the prime minister, to declare, however prematurely, that the euro crisis is nearly over. In Spain Mariano Rajoy’s government has tackled the job market and is about to unveil a tight budget. For all their troubles, Greeks know that the free-spending and tax-dodging are over. But one country has yet to face up to its changed circumstances.



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France is entering the final three weeks of its presidential campaign. The ranking of the first round, on April 22nd, remains highly uncertain, but the polls back François Hollande, the Socialist challenger, to win a second-round victory. Indeed, in elections since the euro crisis broke, almost all governments in the euro zone have been tossed out by voters. But Nicolas Sarkozy, the Gaullist president, has been clawing back ground. The recent terrorist atrocity in Toulouse has put new emphasis on security and Islamism, issues that tend to favour the right—or, in the shape of Marine Le Pen, the far right.



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Yet what is most striking about the French election is how little anybody is saying about the country’s dire economic straits (see article). The candidates dish out at least as many promises to spend more as to spend less. Nobody has a serious agenda for reducing France’s eye-watering taxes. Mr Sarkozy, who in 2007 promised reform with talk of a rupture, now offers voters protectionism, attacks on French tax exiles, threats to quit Europe’s passport-free Schengen zone and (at least before Toulouse) talk of the evils of immigration and halal meat. Mr Hollande promises to expand the state, creating 60,000 teaching posts, partially roll back Mr Sarkozy’s rise in the pension age from 60 to 62, and squeeze the rich (whom he once cheerfully said he did not like), with a 75% top income-tax rate.


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France’s defenders point out that the country is hardly one of the euro zone’s Mediterranean basket cases. Unlike those economies, it should avoid recession this year.

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Although one ratings agency has stripped France of its AAA status, its borrowing costs remain far below Italy’s and Spain’s (though the spread above Germany’s has risen). France has enviable economic strengths: an educated and productive workforce, more big firms in the global Fortune 500 than any other European country, and strength in services and high-end manufacturing.



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However, the fundamentals are much grimmer. France has not balanced its books since 1974. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a bigger chunk of output than in any other euro-zone countrymore even than in Sweden.


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The banks are undercapitalised. Unemployment is higher than at any time since the late 1990s and has not fallen below 7% in nearly 30 years, creating chronic joblessness in the crime-ridden banlieues that ring France’s big cities. Exports are stagnating while they roar ahead in Germany.


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France now has the euro zone’s largest current-account deficit in nominal terms. Perhaps France could live on credit before the financial crisis, when borrowing was easy. Not any more. Indeed, a sluggish and unreformed France might even find itself at the centre of the next euro crisis.


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It is not unusual for politicians to avoid some ugly truths during elections; but it is unusual, in recent times in Europe, to ignore them as completely as French politicians are doing. In Britain, Ireland, Portugal and Spain voters have plumped for parties that promised painful realism. Part of the problem is that French voters are notorious for their belief in the state’s benevolence and the market’s heartless cruelty. Almost uniquely among developed countries, French voters tend to see globalisation as a blind threat rather than a source of prosperity. With the far left and the far right preaching protectionism, any candidate will feel he must shore up his base.



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Many business leaders cling to the hope that a certain worldly realism will emerge. The debate will tack back to the centre when Mr Sarkozy and Mr Hollande square off in the second round; and once elected, the new president will ditch his extravagant promises and pursue a sensible agenda of reform, like other European governments. But is that really possible? It would be hard for Mr Sarkozy suddenly to propose deep public-spending cuts, given all the things he has said. It would be harder still for Mr Hollande to drop his 75% tax rate.


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1981 and all that



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Besides, there is a more worrying possibility than insincerity. The candidates may actually mean what they say. And with Mr Hollande, who after all is still the most likely victor, that could have dramatic consequences.


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The last time an untried Socialist candidate became president was in 1981. As a protégé of François Mitterrand, Mr Hollande will remember how things turned out for his mentor. Having nationalised swathes of industry and subjected the country to two devaluations and months of punishment by the markets, Mitterrand was forced into reverse.


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Mr Hollande’s defenders say he is a pragmatist with a more moderate programme than Mitterrand’s. His pension-age rollback applies only to a small set of workers; his 75% tax rate affects a tiny minority.


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Yet such policies indicate hostility to entrepreneurship and wealth creation and reflect the French Socialist Party’s failure to recognise that the world has changed since 1981, when capital controls were in place, the European single market was incomplete, young workers were less mobile and there was no single currency. Nor were France’s European rivals pursuing big reforms with today’s vigour.


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If Mr Hollande wins in May (and his party wins again at legislative elections in June), he may find he has weeks, not years, before investors start to flee France’s bond market. The numbers of well-off and young French people who hop across to Britain (and its 45% top income tax) could quickly increase.


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Even if Mr Sarkozy is re-elected, the risks will not disappear. He may not propose anything as daft as a 75% tax, but neither is he offering the radical reforms or the structural downsizing of spending that France needs. France’s picnickers are about to be swamped by harsh reality, no matter who is president.

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Special report: Financial innovation

Playing with fire

Financial innovation can do a lot of good, says Andrew Palmer. It is its tendency to excess that must be curbed
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Feb 25th 2012





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FINANCIAL INNOVATION HAS a dreadful image these days. Paul Volcker, a former chairman of America’s Federal Reserve, who emerged from the 2007-08 financial crisis with his reputation intact, once said that none of the financial inventions of the past 25 years matches up to the ATM. Paul Krugman, a Nobel prize-winning economist-cum-polemicist, has written that it is hard to think of any big recent financial breakthroughs that have aided society. Joseph Stiglitz, another Nobel laureate, argued in a 2010 online debate hosted by The Economist that most innovation in the run-up to the crisis “was not directed at enhancing the ability of the financial sector to perform its social functions”.



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Most of these critics have market-based innovation in their sights. There is an enormous amount of innovation going on in other areas, such as retail payments, that has the potential to change the way people carry and spend money. But the debate—and hence this special reportfocuses mainly on wholesale products and techniques, both because they are less obviously useful than retail innovations and because they were more heavily implicated in the financial crisis: think of those evil credit-default swaps (CDSs), collateralised-debt obligations (CDOs) and so on.
This debate sometimes revolves around a simple question: is financial innovation good or bad? But quantifying the benefits of innovation is almost impossible. And like most things, it depends. Are credit cards bad? Or mortgages? Is finance as a whole?


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It is true that some instruments—for example, highly leveraged ones—are inherently more dangerous than others. But even innovations that are directed to unimpeachablygoodends often bear substantial resemblances to those that are now vilified.



For a demonstration, look at Peterborough. The cathedral city in England’s Cambridgeshire is known for its railway station and an underachieving football club nicknamedthe Posh”. But it is also the site of a financial experiment that its backers hope will have big ramifications for the way public services are funded.



Peterborough is where the proceeds of the world’s firstsocial-impact bond” are being spent. This instrument is not really a bond at all but behaves more like equity. In September 2010 an organisation called Social Finance raised £5m ($7.8m) from 17 investors, both individuals and charities. The money is being used to pay for a programme to help prevent ex-prisoners in Peterborough from reoffending. Reconviction rates among the prisoners recruited to the scheme will be measured against a national database of prisoners with a similar profile, and investors will get payouts from the Ministry of Justice if the Peterborough cohort does better than the rest. If all goes well, the first payouts will be made in 2013.



The scheme is getting lots of attention, and not just in Britain. A mixture of social and financial returns is central to a burgeoning asset class known as “impact investing”. Linking payouts to outcomes is attractive to governments keen to husband scarce resources. And if service providers like the people running the Peterborough prisoner-rehabilitation scheme can get a lump sum up front, they can plan ahead without bearing any financial risk. There is talk of introducing social-impact bonds in Australia, Canada and the United States.



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Here, surely, is a financial innovation that even the industry’s critics would agree is worth trying. Yet in fundamental ways an ostensiblygoodinstrument like a social-impact bond is not so different from its despised cousins. First, at its root the social-impact bond is about creating a set of cashflows to suit the needs of the sponsor, the provider and the investor.

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True, the investors in the Peterborough scheme may be more willing than the average individual or pension fund to sacrifice financial returns for social benefits. But as Franklin Allen of the Wharton School at the University of Pennsylvania and Glenn Yago of the Milken Institute, a think-tank, argue in their useful book, “Financing the Future”, the thread that runs through much wholesale financial innovation is the creation of new capital structures that align the interests of lots of different parties.


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Second, the social-impact bond is based on the concept of risk transfer, in this case from the government to financial investors who will get paid only if the scheme is successful. Risk transfer is also one of the big ideas behind securitisation, the bundling of the cashflows from mortgages and other types of debt on lenders’ books into a single security that can be sold to capital-markets investors. The credit-default swap is an even simpler risk-transfer instrument: you pay someone else an insurance premium to take on the risk that a borrower will default.


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Third, even at this early stage the social-impact bond is grappling with the difficulties of measurement and standardisation. An obvious example is the need to create defined sets of measurements in order to work out what triggers a payout—in this case, the comparison between the Peterborough prisoners and a control group of other prisoners in a national database. Across finance, standardisation—around contracts, reporting, performance measures and the like—is what enables buyers and sellers to come together quickly and new markets to take off.

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Neither angels nor demons
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For all the similarities, there are two big differences between the social-impact bond and other, less lauded financial instruments. The first is that the new tool has been designed explicitly for a social purpose. But ask a pensioner how much money he wants to put into prisoner rehabilitation, and it isn’t likely to be all that much.


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Whether protecting a retirement pot or signalling problems with a government’s debt burden, finance can be “socially useful” (to use a phrase popularised by Adair Turner, the outgoing chairman of Britain’s Financial Services Authority) without being obviously social. Lord Turner himself acknowledged that in a speech he gave in London in 2009: “It is in the nature of markets that there are some things which are indirectly socially useful but which in the short term will look to the external world like pure speculation.”


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Many people point to interest-rate swaps, which are used to bet on and hedge against future changes in interest rates, as an example of a huge, well-functioning and useful innovation of the modern financial era. But there are more contentious examples, too. Even the mention of sovereign credit-default swaps, which offer insurance against a government default, makes many Europeans choke. There are some specific problems with these instruments, particularly when banks sell protection on their own governments: that means a bank will be hit by losses on its holdings of domestic government bonds at the same time as it has to pay out on its CDS contracts.
But in general a sovereign CDS has a useful signalling function in an area tilted heavily in favour of governments (which do not generally have to post collateral and can bully domestic buyers into investing).




The second difference is that social-impact bonds are still in their infancy, whereas other crisis-era innovations were directly involved in a gigantic financial crisis. There are questions to answer about their culpability. A few products from that period do look inherently flawed. Only the bravest are prepared to defend the more exotic mortgage products that sprouted at the height of America’s housing bubble as lenders found ever more creative ways to bring unaffordable houses within reach.


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Finance professionals almost blush to recall an instrument called the constant-proportion debt obligation, a 2006 invention of ABN AMRO that added leverage when it took losses in order to make up the shortfall. The end of the structured investment vehicle (SIV), an off-balance-sheet instrument invented to game capital rules, is not much lamented. And the complexity of the “CDO-squared” has been widely condemned.



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But even now it is hard to find fault with the concept, as opposed to the practical application, of many of the most demonised products. The much-criticised CDO, which pools and tranches income from various securities, is really just a capital structure in miniature. Risk-bearing equity tranches take the first hit when things go wrong, and more risk-averse investors are more protected from losses. (Euro-zone leaders like the idea enough to have copied it with their plans for special-purpose investment vehicles for peripheral countries’ sovereign debt.) The real problem with the CDOs that blew up was that they were stuffed full of subprime loans but treated by banks, ratings agencies and investors as though they were gold-plated.

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As for securitisation and credit-default swaps, it would be blinkered to argue they have no problems. Securitisation risks giving banks an incentive to loosen their underwriting standards in the expectation that someone else will pick up the pieces. CDS protection may similarly blunt the incentives for lenders to be careful when they extend credit; and there is a specific problem with the way that the risk in these contracts can suddenly materialise in the event of a default.



But the basic ideas behind both these two blockbuster innovations are sound. India, with a far more conservative financial system than America, allowed its first CDS deals to be done in December, recognising that the instrument will help attract creditors and build its domestic bond market.

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Similarly, securitisation—which worked well for decadesallows banks to free up capital, enabling them to extend more credit, and helps diversification of portfolios as banks shed concentrations of risks and investors buy exposures that suit them. Securitisation is a good thing. If everything was on banks’ balance-sheets there wouldn’t be enough credit,” says a senior American regulator.


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Rather than asking whether innovations are born bad, the more useful question is whether there is something that makes them likely to sour over time.

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Greed is bad


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There is an easy answer: people. When bubbles froth, greedy folk use innovations inappropriately—to take on exposures that they should not, to manufacture risk rather than transfer it, to add complexity in order to plump up margins rather than solve problems. But in those circumstances old-fashioned finance goes mad, too: for every securitisation stuffed with subprime loans in America, there was a stinking property loan sitting on the balance-sheet of an Irish bank or a Spanish caja. “Duff credit analysis is always the cause of the problem,” says Simon Gleeson of Clifford Chance, a law firm.



This argument has a lot of power. When greed takes hold, finance in all its forms is undone. Yet blaming the worst outcomes of financial innovation on human frailty is hardly helpful. This special report will point to the features of financial innovations that can turn them into troublemakers over time and show how these can be managed better.
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In simple terms, finance lacks an “offbutton. First, the industry has a habit of experimenting ceaselessly as it seeks to build on existing techniques and products to create new ones (what Robert Merton, an economist, termed the “innovation spiral”).
Innovations in financeunlike, say, a drug that has gone through a rigorous approval process before coming to market—are continually mutating.

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Second, there is a strong desire to standardise products so that markets can deepen, which often accelerates the rate of adoption beyond the capacity of the back office and the regulators to keep up.

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As innovations become more and more successful, they start to become systemically significant. In finance, that is automatically worrying, because the consequences of any failure can ripple so widely and unpredictably. In a 2011 paper for the National Bureau of Economic Research, Josh Lerner of Harvard Business School and Peter Tufano of Said Business School also argue that in a typicalS-curvepattern, in which the earliest adopters of an innovation are the most knowledgeable, a widely adopted product is more likely to have lots of users with an inadequate grasp of the product’s risks. And that can be a big problem when things turn out to be less safe than expected.

domingo, abril 01, 2012

AN INCONVENIENT TRUTH / THE ECONOMIST ( A MUST READ )

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The French election

An inconvenient truth

The French have had a security wake-up call. But when it comes to the dangers facing their economy, they are still dozing

Mar 31st 2012
PARIS         



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A WEEK after France was shaken by terrorist shootings in and around Toulouse, candidates for the country’s presidential election have gone back to the stump. The tone is a little less shrill, the contenders respectful of the sombre mood. Yet the return to electioneering has a surreal quality nonetheless, unlinked to the new concerns about security. For the country faces an imminent economic shock, which the presidential candidates are utterly failing to acknowledge.
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The awkward truth is that France, the second-biggest economy in the euro zone after Germany, faces a public-finance squeeze. French public spending now accounts for 56% of GDP (see chart 1), compared with an OECD average of 43.3%: higher even than in Sweden. For years France has offered its people a Swedish-style social model of services, benefits and protection, but has failed to create enough wealth to pay for it.


Today France continues to behave as if it enjoyed Sweden’s or Germany’s public finances, when in truth they are closer to those of Spain. Although France and Germany have comparable public-debt levels, at over 80% of GDP, Germany’s is now inching downwards whereas France’s is at 90% and rising. One rating agency has already stripped France of its AAA credit rating over worries about high debt and low growth. The country’s auditor, the Cour des Comptes, chaired by Didier Migaud, a former Socialist deputy, has warned that unlessdifficult decisions” are taken this year and next on spending, public debt could reach 100% by 2015 or 2016.
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The underlying problem is that, over the past ten years, France has lost competitiveness. In 2000 hourly labour costs in France were 8% lower than those in Germany, its main trading partner; today, they are 10% higher (see chart 2).


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French exports have stagnated while Germany’s have boomed. An employer today pays twice as much in social charges in France as he does in Germany. France’s unemployment rate is 10% next to 5.8% in Germany—and has not dipped below 7% for nearly 30 years.


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This erosion of French competitiveness raises hard questions about the underlying social compact. Frenchmen cherish the notion that everyone has an equal right to decent services in good times and a generous safety net in bad. But what sort of level of support, in sickness, joblessness, infancy or old age, can France really afford to offer its citizens? How can the country justify its massive public administration—a millefeuille of communes, departments, regions and the central state—which employs 90 civil servants per 1,000 population, compared with 50 in Germany? How can France lighten the tax burden, including payroll social charges, so as to encourage entrepreneurship and job creation?


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Put simply, France is about to face the tough choices that Gerhard Schröder, Germany’s former chancellor, confronted in the early 2000s or that Sweden did in the mid-1990s, when its own unsustainable social system collapsed. The euro-zone crisis, which has made bond markets unsparing of slack economic management, means that these decisions have become both more urgent and more difficult. Whoever is elected at France’s two-round presidential election on April 22nd and May 6th will face a choice. If he fails to be tough enough on the deficit, markets will react badly, and France could find itself at the centre of a new euro-zone financing crisis. If he tackles the deficit with tax increases across the board and even spending cuts, voters will not be remotely prepared for it.


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“The real risk for the euro zone now is not Greece, but France,” says a top French finance boss. Nicolas Baverez, a commentator who foresaw the country’s looming debt problems in a bestselling book of 2003, agrees: “I’m convinced that France will be the centre of the next shock in the euro zone.”


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The candidates, however, are masterfully managing to duck all this. Before the Toulouse shootings intervened, the campaign turned around such pressing matters as halal slaughterhouses, immigration and tax exiles. Although both Nicolas Sarkozy, the Gaullist incumbent, and François Hollande, his Socialist rival, have embraced deficit reduction, each vowing to bring France’s budget deficit down to 3% of GDP next year, neither is promising to do so by making radical spending cuts.


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Both presidential front-runners instead rely heavily on balancing the books through tax increases. Mr Sarkozy has already raised corporate and income tax. He now says he wants to tax even those who leave France for tax reasons.


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Mr Hollande promises a 75% top income-tax rate on those earning over €1m ($1.3m) a year, which means they would pay over 90% after social charges. He also wants to increase the annual wealth tax, levied annually on assets worth over €1.3m, and tax dividends more. He vows to raise the minimum wage, create 60,000 teaching jobs, lower the minimum retirement age to 60 for those who began work young, and “renegotiate” the European fiscal compact, a hard-won deal that seeks to guarantee budgetary discipline.

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How can France be holding an election that so signally fails to confront the right questions? What are the chances that any of the candidates, if elected, is ready to face up to the shock that is to come?


A parallel universe



Last summer Jean-Pascal Tricoire, the chief executive of Schneider Electric, a French energy-services company founded in Burgundy in 1836, packed up and moved to Hong Kong to run the company from Asia. He took two top executives with him; others followed. They join a new French exodus to Hong Kong, particularly among entrepreneurs.
Schneider Electric’s official headquarters, and tax domicile, remains in France. But with only 8% of annual turnover in France these days, the firm’s eyes are on the rest of the world.



Spend time with the chiefs of France’s foremost companies and, like Schneider Electric, their concerns are global. They talk about Brazil and China, and are constantly watching their international competitiveness.


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With more Fortune 500 companies than any other European country, France has a global leader in almost every sector from insurance (AXA) to cosmetics (L’Oréal). These firms know full well how damaging a 75% tax rate, for instance, would be. “A catastrophe,” says one boss. Completely mad,” says another.

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Yet ordinary French folk seem almost uniquely hostile to these very companies, and to the globalised markets that have helped to make their economy the fifth-largest in the world. Only 31% of the French agree that the free-market economy is the best system available, according to a poll by Globescan, a polling firm (see chart 3); across ten years of polling, the French have consistently been among the most distrustful of capitalism. This is the France that voted no” in 2005 to the draft European Union constitution, amid fears about Polish plumbers flooding into France under single-market rules. And this is the France that made a book calling for “deglobalisation” a bestseller last year.



The French live with this national contradictionenjoying the wealth and jobs that global companies have brought, while denouncing the system that created them—because the governing elite and the media convince them that they are victims of global markets. Trade unionists get far more air-time than businessmen. The French have consistently been told that they are the largely innocent victims of reckless bankers who lent foolishly, or wanton financial speculators, or “Anglo-Saxoncredit-ratings agencies. Mr Sarkozy has called for capitalism to becomemoral” so as to curb such abuse. Mr Hollande has declared that his “main opponent is the world of finance”. Few politicians care to point out that a big part of the problem is the debt that successive French governments themselves have built up over the decades. Why?

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The explanation is part conviction, part calculation. Neither the French right nor the left has ever fully embraced market-friendly thinking, except under duress. Despite the occasional liberal impulse, Mr Sarkozy is part of the Gaullist family, which largely rejects such a doctrine. Most of today’s Socialist leaders cut their political teeth working for François Mitterrand (Mr Hollande was on his presidential staff); the party still worries far more about redistribution than wealth creation. “The soul of France”, declared Mr Hollande when launching his campaign, “is equality.” Liberal candidates in France tend to get nowhere. Ten years ago the most recent such presidential hopeful, Alain Madelin, got just 3.9% of the vote.



Dangerous talk



So it is with today’s election. Rather than confronting these attitudes, and shaking the French out of their comfort zone, the two front-runners are pandering to popular reflexes. At a giant rally in Villepinte, north of Paris, Mr Sarkozy laid into EU trade rules, which he said had unleashedsavagecompetition; called for a “Buy European Act” for public procurement if non-European trading partners did not open up their markets; and threatened to pull the country out of the Schengen passport-free zone, unless fellow members did more to control immigration from outside the area. Apparently without irony, the son of a Hungarian immigrant started to tread on nasty ground, with talk of “too many foreigners” in France. All this is meant to reassure fretful French voters, who think Europe is failing to protect them from global competition.



Certainly Mr Sarkozy can point to some useful liberalising reforms on his watch, such as a rise in the minimum retirement age from 60 to 62, or the granting of autonomy to universities. He also pointed to the crushing weight of French social charges on employers, which deter job creation and which he has trimmed a bit. But the politician who once wrote disapprovingly that France “has never stopped discouraging initiative and punishing success” has now raised taxes on the rich, and bashes big bosses and bankers at every turn.



All this is also tactical. In the first round of voting in France (as in America’s primaries), candidates try to shore up their base; in the run-off, they compete for the centre. On the far right Mr Sarkozy has to confront Marine Le Pen, the telegenic National Front candidate. Present polls put her in distant third or even fourth place, with 16%-18% of the first-round vote, compared with 28% or so each for Mr Sarkozy and Mr Hollande. But nobody has forgotten that her father, Jean-Marie, snatched a place in the second round in 2002 at the Socialists’ expense. The feisty Ms Le Pen, who has rid the party of its jack-booted image, is unlikely to repeat that feat. Her strong campaign nevertheless frames much of the election debate, with calls to leave the euro, reindustrialise the country and curb Islamification.



Mr Hollande faces a similar squeeze on the left. With a reputation as a moderate, who promises to introduce his own balanced-budget law, he has been struggling to keep the hard left at bay in the person of Jean-Luc Mélenchon, a one-time Trotskyite and former Socialist senator now backed by the Communist party. At a recent rally held, with theatrical symbolism, at the Bastille, Mr Mélenchon called for a “civic insurrection” against the “ancien régime”. He wants full pensions for all at 60, a 20% hike in the minimum wage and a cap on all salaries at €360,000 a year. With his tub-thumping style and gruff manner, Mr Mélenchon’s campaign has been a sensation. More than one in ten French people say they will vote for him.



Although most of this electorate would then swing behind Mr Hollande in the second round, Mr Mélenchon’s recent poll surge has been nibbling away at Mr Hollande’s numbers, depriving him of the momentum that might carry him to victory. Hence his plans for a new tax on financial transactions, the abolition of stock options and the 75% tax rate. Hence too his stinging attacks on finance and wealth, and denunciation of the new super-rich as “grasping and arrogant”.


Opération décryptage


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Many French commentators dismiss all this as mere political posturing. Aides to both front-runners argue that, in reality, each understands what is at stake.


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The 75% tax rate, says Olivier Ferrand, head of Terra Nova, a Socialist-linked think-tank, is “just a symbolic measure”: even Mr Hollande has conceded that it will bring in little revenue, if any. Behind all the rhetoric, Mr Ferrand insists, “the Socialist Party has modernised, and does understand the need to improve competitiveness and control the deficit.”



Mr Hollande, a jovial character in private, rejects the idea that he is dangerous, stating as much—in English—as he arrived in London in February. He has put in charge of his campaign two men, Pierre Moscovici and Manuel Valls, who were once close to the moderate Dominique Strauss-Kahn, ex-boss of the IMF, who has been ruled out of the race by a sex scandal. Once in power, French Socialists can end up doing sound things. With Mr Strauss-Khan as his finance minister, Lionel Jospin, the Socialist prime minister in 1997-2002, privatised more French companies than all his predecessors put together. “We liberalised the economy, and opened up the markets to finance and privatisation,” recalled Mr Hollande before heading to London.


The obliviousness of spring

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Yet it requires much forbearance on the part of the electorate to accept that the candidate will not do half the things he has said he will. There is a serious risk of disappointment if, for example, President Hollande were to say upon taking office: “We have examined the public accounts and, quel dommage, there is no money for anything I promised after all.” And in order to defuse this risk the new president would have to put into place at least some of his dafter ideas, if only as a political gesture. The last such measure the Socialists introduced was the 35-hour working week.



Decoding Mr Sarkozy is no easier. He has now eased off on some of his more unpleasant rhetoric, but plenty more is merely disingenuous. There is already, for instance, a Schengen review under way that would allow members to suspend free movement in certain circumstances. His idea of an American-style tax on the French abroad, but only on those who have left to avoid such taxes, would be all but impossible to apply. Perhaps he knows as much, and would do none of it. Indeed, Mr Sarkozy’s friends claim that he would turn out to be a reformist president if re-elected. “Sarkozy started to campaign by calling for German-style reforms,” says one adviser. “But he realised he had no chance of winning with that, because it’s unpopular, so he has gone for rightist, populist measures instead.” In office, claims the same adviser, he would turn out to be a “very active, reformist president”.



Amid all this doublespeak, the one candidate who has consistently talked about the need for debt reduction and spending cuts is François Bayrou, a centrist. He is a perennial presidential contender, without much of a party behind him, who gets off his tractor on his Béarn farm every five years to run for office in Paris. Mr Bayrou is no liberal: he wants a “fair price” for farm produce, and proposes voting rights for unions on company boards. But he at least promises €50 billion in spending cuts (alongside €50 billion in tax increases, including a new top income-tax rate of 50%, up from 44% now). Dismissing Mr Hollande’s 75% tax rate as “crazy”, he deplores the level of political debate.


“We are not asking any of the questions on which France’s future survival depends,” says Mr Bayrou. “When a country doesn’t tackle any of these questions, it runs the risk of catastrophe.” For now, though, the voters do not seem to care for this message: Mr Bayrou’s numbers are no better than Mr Mélenchon’s, which have surged to 12-13%.



Promises to break



All of which leaves voters with the unenviable task of deciphering which part of each candidate’s message is credible, and which part pure fantasy. The best guess is that both front-runners, for their own political security, would need to put in place a couple of the barmier ideas. This could be damaging enough. In 2007, after equally tough talk about immigration, Mr Sarkozy went ahead and set up a ministry of national identity—only to abolish it later on, having caused much offence along the way. Were a President Hollande to implement his 75% tax ratejust when Britain has cut its top rate from 50% to 45%—it would send an untimely message abroad about the way France treats financial success, much as the 35-hour week tarnished the country’s image for years. His overall tax policy would tell aspiring French entrepreneurs that they might be better off launching a good idea elsewhere.



The inconvenient truth is that whoever emerges the victor on May 6th will need to show a tough approach to the deficit, in the face of wary bond markets and possible recession. A President Sarkozy would need to find new budget savings, despite his promise to “protect” the French from austerity. A President Hollande would be forced to postpone or scrap some of his spending pledges, and would get a taste of German steeliness if he insisted on pushing Chancellor Angela Merkel on the subject of reviewing the fiscal compact. Either way, the result would be a shock for the French, and one that neither candidate has remotely prepared them for.