The optimism at the end of Sarkozy's era vanished as Hollande (centre) seemed to dither. Photograph: Raymond Depardon/Magnum Photos
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The sorrows of Mr Weak

Since the minister in charge of tax avoidance was forced to admit to a secret Swiss bank account, François Hollande’s entire government has begun to look shaky. How did it go so wrong, so fast?

One blustery day in mid-April, I left my pied-à-terre in Paris’s 11th arrondissement and headed south towards the Seine. I crossed the river by the Île Saint-Louis and made for Gibert Jeune, a large bookshop on the Left Bank at the northern end of the Boulevard Saint-Michel. I was searching for a copy of Rien ne se passe comme prévu (“nothing goes as planned”) by Laurent Binet. It is a quasijournalistic account, inflected with some of the mannerisms of American New Journalism, of François Hollande’s 2011-2012 campaign for the French presidency.

I’d enjoyed Binet’s novel, HHhH, and was interested to discover what he made of Hollande, the upper-middle-class doctor’s son, born in Rouen in 1954, who had committed himself to the politics of the left at a young age. I remembered the excitement that his campaign, with its commitment to levy a 75 per cent tax on high incomes, had elicited in Labour circles on this side of the Channel. Was this deceptively mild-mannered fonctionnaire, whose rhetoric often evoked the days of the Popular Front in the 1930s, a model for a new generation of social-democratic leaders in Europe?

By the time I arrived in Paris, however, the excitement that Hollande once induced on the left was a distant memory. The 75 per cent tax on those earning more than €1m a year had been ruled unconstitutional and the accidental president’s poll ratings were in free fall. The weekly news magazine L’Expressseemed to catch the popular mood with a cover depicting Hollande as “Monsieur Faible” (“Mr Weak”).

Having found a second-hand copy of Binet’s book, I walked west to the seventh arrondissement to meet the English writer and academic Andrew Hussey. He works at the Paris outpost of the University of London and his office overlooks the Esplanade des Invalides, close to the National Assembly, the lower house of the French parliament. The following week, the esplanade would be thronged with protesters, most of them Catholic, agitating against legislation to legalise gay marriage and adoption. In the small hours of 18 April a scuffle broke out on the floor of the Assembly when a rightwing opponent of gay marriage brandished a woman’s shoe that belonged, he claimed, to a young female protester. The next day the papers were full of excited talk about a Catholic “printemps français” (French spring) and even a right-wing version of the protests of May 1968.

None of this would have surprised Hussey, who has made the subject of intellectual and political violence in France his own. Over lunch, we talked about the lurid rhetorical overinvestment that so often characterises French politics, the obsession with gloire and grandeur. It struck me later that the French still expect their president to embody national grandeur, and that the mild and reticent Hollande struggles to do so.

Just how much he is struggling was made clear in an opinion poll published in Le Journal du Dimanche on 21 April, less than a year after he replaced Nicolas Sarkozy in the Élysée Palace. Seventy-four per cent of respondents declared themselves “unhappy” with his performance.

Never in the 55-year history of the French Fifth Republic have approval ratings for an incumbent president been so low so early in a presidency. Sarkozy achieved a comparable level of dissatisfaction (72 per cent) in April 2011, but by then he was almost four years in to the job; hisimmediate predecessor, Jacques Chirac, earned the opprobrium of 70 per cent of those polled in November 1995, and that was in the middle of a general strike. The only other Socialist president of the Fifth Republic, François Mitterrand, managed a disapproval rating of 65 per cent in December 1991, three and a half years in to a second seven-year term. As for the architect of the Fifth Republic, Charles de Gaulle, the worst it ever got for him was in March 1963, when a poll showed that 40 per cent of voters were unhappy with his leadership.

Hollande’s abject standing in the polls owes something to the humiliation of his former budget minister, Jérôme Cahuzac. On 2 April Cahuzac finally admitted, after a series of straight-faced denials, that he had used a secret Swiss bank account to avoid paying tax in France.

By then, the affair had been rumbling on for several months. In December, the investigative website Mediapart claimed that Cahuzac, who began his career as a cosmetic surgeon specialising in hair transplants, had kept an account at UBS in Geneva since the early 1990s. Mediapart’s case relied heavily on a report into Cahuzac’s financial affairs written in 2008 by Rémy Garnier, a former tax inspector in the south-western department of Lot-et-Garonne, where Cahuzac’s parliamentary constituency was located.

Cahuzac’s response to the revelations was swift and robust. He described Mediapart’s claims as “defamatory” and insisted in interviews that he had “never” had a bank account in Switzerland or anywhere else outside France. He also assured the prime minister, Jean-Marc Ayrault, of his good faith. The strategy seemed to be working until, in January this year, magistrates in Paris began building a case against him. Cahuzac’s resignation, which he finally announced on 19 March, was by then inevitable.

As a consequence of the affair, Hollande has become the focus for deep disaffection with what the French call “la classe politique”, the caste of ideologically nimble and sometimes extravagantly wealthy technocrats who usually fill governments of both right and left.

Like most front-rank French politicians, Hollande is an énarque, a graduate of the elite École Nationale d’Administration. He graduated first in his class in 1981. Among his contemporaries were his ex-partner Ségolène Royal, who ran as the Socialist candidate for president in 2007, the former centre-right prime minister Dominique de Villepin and the head of the new bank for public investment, Jean-Pierre Jouyet.

To the sociologists Michel Pinçon and Monique Pinçon-Charlot, the authors of President of the Rich: an Investigation into the Oligarchy in Sarkozy’s France (2010), the Cahuzac affair was cause for “intense intellectual jubilation”. They told the political weekly Le Nouvel Observateur: “The affair validates our theses concerning this caste which dominates France, this micro-society composed of people from left and right who function in the same way, with their wealth and their networks . . . It was another example of the power of oligarchy after the Dominique Strauss-Kahn scandal.”

Voters have no doubt made this very connection between Cahuzac and the disgraced Strauss-Kahn, whose likely run for the Socialist nomination for president was derailed by the exposure of a sex scandal in May 2011. (The two men were political allies; they also share a lawyer.) The public will also have recalled that Cahuzac had been leading the Hollande government’s struggle against tax fraud. He helped to draft a finance law that included important measures to combat tax evasion (notably the introduction of a 60 per cent levy on undeclared funds held abroad by French citizens).

Hollande’s response to the scandal has been uncharacteristically decisive. On 10 April, rather than leave it to Ayrault, the president, in the glare of television cameras, announced a wide-ranging “transparency” programme designed, among other things, to “remoralise” public life. The most eye-catching of these emergency measures was the requirement that cabinet ministers make a public declaration of their assets. They did so in short order – Ayrault revealing, to some amusement among journalists, that in addition to two houses worth more than €1m in total, he owns a 1988 Volkswagen kombi valued at €1,000.

It was the second time in a week that Hollande had gone on television to address the French people directly, something they weren’t accustomed to. He declared himself “hurt by what has happened”, an unusual admission from one who makes such a fetish of his sang-froid.

Catherine Fieschi, who is the director of the British think tank Counterpoint and has advised French administrations of all political complexions, tells me that communication has been Hollande’s biggest challenge. “The tragedy of it is that he’s not actually doing badly, though he’s doing very badly in the polls,” she says. “He’s got a huge communications problem.

“The big reproach is that he doesn’t govern. But the fact is that he does govern in most cases, but he’s been very bad at keeping people informed of what he’s doing –wilfully to begin with, because he wanted to break with the Sarkozy model.”

The president recognises that he must offer decisive leadership at a time of national crisis, yet this sits uneasily with his profound mistrust of the imperial presidency that was one of de Gaulle’s most ambiguous legacies. Shortly after Sarkozy was elected in 2007, Hollande denounced the new president’s method, which consisted, he said, of pretending that “the president can do it all alone” and “announcing this on television”. The irony is that Hollande has found himself doing exactly what he criticised Sarkozy for – supposing, as an article in Le Monde put it, that for every crisis, one can concoct a law in response. The Hollande presidency was meant to have broken with such legislative hyperactivity in the name of “normality” and the “exemplary republic”.

Suspicions on the French left about the institutions of the Fifth Republic have a long history. The strong presidency proposed by de Gaulle in 1958, as an antidote to the political instability caused by the Algerian war of independence, was opposed by the leaders of the non-communist left, Mitterrand and Pierre Mendès France. In 1964, Mitterrand published a book, Le coup d’État permanent, in which he accused de Gaulle of replacing the idea of popular representation with that of the infallible strong man. However, this didn’t stop Mitterrand running for president the following year, and again in 1974 and 1981, when at last he won, beating Valéry Giscard d’Estaing.

Once he was established in the Elysée, Mitterrand’s misgivings about the “permanent coup d’état” soon evaporated. He had campaigned on the promise of restoring to parliament its “constitutional rights”, but in practice he left it little more room for manoeuvre than de Gaulle had ever envisaged for it. (That said, he was forced to endure “cohabitation” with two prime ministers of the right, Jacques Chirac and Édouard Balladur, an arrangement de Gaulle would have found unconscionable.)

Mitterrand’s exercise of the office of president – the cultivation of courtiers, the manipulation of cliques and the dispensing of favours – earned him the nickname “the Florentine”. Even if Hollande were temperamentally disposed to operating in this way, he could never gather around him enough placemen to build a Machiavellian court. “One of the big problems,” Fieschi says, “is his position within the Parti Socialiste [PS]. He might have been a party apparatchik but he had no support inside the PS headquarters in rue de Solférino. He was an accidental candidate. They rallied behind him when they saw he had a chance after the fall of Strauss-Kahn, but I don’t think he really had the party with him.”

Indeed, the party was notably quick, in the person of its first secretary, Harlem Désir, to criticise the government’s handling of economic policy, which Désir judged too focused on deficit reduction at the expense of growth and the fight against unemployment. This criticism was echoed recently by three ministers, including Arnaud Montebourg, who ran to Hollande’s left in the Socialist presidential primary in autumn 2011. Montebourg expressed scepticism at the balancing act that Hollande and the finance minister, Pierre Moscovici, are attempting: making the reduction of the deficit –which, at the end of 2012, stood at 4.8 per cent of economic output – their main priority, in deference to their German partners, while denying that this requires “austerity” measures of the kind being adopted elsewhere in Europe.

Hollande has two problems in this regard. First, he has to manage the expectations of his own party and of PS supporters more broadly. And here the shadow of Mitterrand looms once again. March 2013 marked the 30th anniversary of his “turn to austerity”, when, in the face of rising unemployment, high inflation and exchange-rate difficulties that led to a succession of devaluations of the franc, his government formally abandoned the model of statist economic management it had adopted in 1981.

March 1983 was a seminal moment in the history of the Parti Socialiste. Arthur Goldhammer, a historian of French politics who teaches at Harvard, has written that the PS remains divided “between those who have deeply internalised the U-turn of 1981-83 as a step in the right direction”, an accommodation with the world as it is and not as Socialists would wish it to be, and “those who look back on it as a mistake”. Hollande belongs in the first camp; Montebourg and critics to the president’s left place themselves in the second.

Hollande’s other problem is that his economic policy is failing on its own terms. In the election campaign, in order to outflank his opponent, he accepted Sarkozy’s commitment to reduce the deficit to 3 per cent of output by the end of 2013, partly by means of €10m worth of spending cuts. Despite forecasts of anaemic growth, Hollande reiterated this commitment in office. What Ayrault called a “fighting budget” was announced and the target of a 3 per cent reduction pronounced “realistic”.

In November 2012, during the parliamentary debate on the European “fiscal compact”, many on the left of the party, including the PS first secretary, as well as the foreign minister, Laurent Fabius, a wily political streetfighter who served as prime minister under Mitterrand, protested that the treaty meant “austerity for life”. That same month, the European Commission declared that it was unlikely France would reach the 3 per cent target.

 Hollande insisted it could be achieved, and continued to do so until February this year, when he left it to Ayrault to make the following announcement: “We will not be exactly at 3 per cent at the end of 2013, but we will not be far off.”

Who was the minister despatched to tour the radio and television studios to warn that a recalibration of expectations was imminent? None other than Jérôme Cahuzac. As the right-leaning newspaper Le Figaro reported with some glee, one of Cahuzac’s last acts as a minister was to prepare people for the “burial of a presidential promise”.

Jonathan Derbyshire is the culture editor of the New Statesman

Jonathan Derbyshire is Managing Editor of Prospect. He was formerly Culture Editor of the New Statesman.

This article first appeared in the 29 April 2013 issue of the New Statesman, What makes us human?

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

***

In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt