Hollande’s raid on rich is the wrong kind of revolution

Yannick Naud

AFTER little more than a hundred days in power, French President François Hollande’s popularity is dropping fast. Recent polls show that 54 per cent of French citizens are dissatisfied with his performance, compared with approximately 40 per cent in July. It’s little wonder – taxes on the rich, which initially attracted voters, are in danger of pushing business people out of France to countries, like the UK, which are more open to rewarding success.

Pierre Moscovici, France’s pragmatic finance minister, has committed to a budget deficit target of 3 per cent of GDP by 2013. So far, most of the deficit reduction has been done by raising taxes on wealthy households and large corporations. Hollande will outline further measures next month, aimed at reducing the deficit by another €33bn (£25bn) in 2013, the savings calculated as necessary in July by the cour des comptes, France’s national auditor.

The most contentious of these is the 75 per cent tax on top French earners. This would lure some of France’s most talented executives and risk-takers to where there a lighter tax burden. And Hollande’s victory has given the Socialists control of almost every political institution – the presidency, the upper and lower houses of parliament, all but two of the regions and most of the country’s big cities, communes and departments. There is no reason to doubt that the government could push through these budgetary measures, however unpopular.

Risks to the French economy are severe. The country’s banking system is one of the most exposed to peripheral Europe, while the French property market, particularly in Paris, looks worryingly overpriced, having failed to correct from 2007 highs.

And 2013 will bring further challenges. After three consecutive quarters of flat GDP data, the government’s growth forecast of 1.2 per cent in 2013 looks unrealistic.

So far, the government has been trying to increase domestic consumption through such measures as increasing the minimum wage, and capping rent, petrol prices and utilities bills. But given the persistent high unemployment and the continued depreciation of the euro, Hollande should instead be pushing policies that help boost exports to major trading partners, especially in Asia and the US.

And this can only be achieved by making labour less costly, which means reducing taxation on labour and making it more flexible to international competition – especially vis-à-vis United Kingdom, which remains an important competitor in both manufacturing and services.

So, at such a crucial time – when Hollande needs the support of those contributing the most to the French economy – taxes that alienate the affluent are unwise. David Cameron and the UK might not need to roll out the red carpet. Hollande is busy pulling the carpet from underneath his own citizens.

Yannick Naud is a portfolio manager at Glendevon King Asset Management and has worked in convertible bond trading in France, Japan and the UK.