President Hollande and the IMF

Francois Hollande Some would welcome Mr Hollande speaking up for a greater emphasis on growth

Are international policy makers quaking at the possibility that Francois Hollande might soon be President of France?

Spending a few days in Washington and New York last week I was surprised to discover the answer was no.

I didn't meet anyone actively looking forward to a Hollande victory. That would be too much to expect.

Given the choice, diplomats and international officials almost always prefer to have the devil they know in charge of a major country, not to have to get to grips with someone new. And the little they do know of Mr Hollande - like that promise to slap a 75% tax rate on the country's top earners - has not left them very impressed.

However, few expect him actually to go ahead with that tax threat.

What they do expect Mr Hollande to do is to speak up for a more gradual approach to cutting eurozone budget deficits - and a greater emphasis on economic growth.

That is a debate that many senior members of the IMF would greatly welcome. So would many inside the White House.

I have written previously about the IMF's private efforts to persuade Germany and other eurozone countries not to take such a hard line of fiscal austerity in countries like Spain and Italy. These efforts have come more into the open, lately, in the heated debate over Spain's deficit plans, and the publication of the latest IMF Fiscal Monitor.

Privately, and publicly, the Fund supported Spain's recent decision to raise its deficit targets. The Fiscal Monitor even suggests the revised policy should have been looser still.

That same report also concludes that for countries with spare capacity in their economy (which in the current context means most countries in Europe), "fiscal adjustment implemented gradually has a smaller negative impact on growth than an upfront consolidation of the same overall size. This suggests that where feasible, more gradual fiscal consolidation is likely to prove preferable to an approach that aims at 'getting it over with quickly'. "

George Osborne's friend, Christine Lagarde, has never been willing to apply this logic to the UK's budget plans. We have to assume she will be equally tight-lipped in public when it comes to her own country, France.

And yet, if you had read everything that the IMF had produced recently on the subject of deficits and growth, you might well conclude that the Fund is rooting for the socialist - at least when it comes to short-term policies.

Hollande would balance the budget more slower than Sarkozy (by 2017 instead if 2016), and would focus more on tax rises to do it.

That doesn't sound like something the IMF would favour. But applying its own analysis of the so-called "fiscal multipliers" in different countries (the impact on growth of a given change in public spending or taxes) suggests that the socialist's approach would boost French GDP by about 0.2%, relative to President Sarkozy's plan, and cut France's public debt ratio slightly faster.

The difference between them is not large, and there's a big margin for error. Indeed, the IMF says the multiplier in France is particularly hard to measure because of big gaps in the data.

But in publishing all this new data, the Fund is clearly attempting to force a debate in Europe over the pace of fiscal tightening and its likely impact on growth.

Many fund officials would be happy to hear a French President re-ignite that debate after 6 May - though naturally, they would rather the president in question were not (gasp) a socialist.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 79.

    #76 there is another interesting set of stats from OECD which looks at total tax take as a percentage of GDP for a series of countries from 1960.

    What it seems to show is that each country has a different "natural top tax take" by which I mean that if govt tries to squeeze more out, it does not work for long and the govt gets voted out.

    Germany and UK are similar at about 37-38% of GDP

  • rate this

    Comment number 78.

    54, 72 Back before the Euro, Spain was had a genuine growing economy making steel & cars.

    71, 74 Social cohesion is essential to democracy. Without any trust in politicians, why vote or pay taxes? Why do people resort to the extreme? Where's the trust, when M's income is 100 times mine & mine is 100 times that of the lowest paid?

    H's best bet is a tax on employers who pays super salaries.

  • rate this

    Comment number 77.

    Steph, your esteemed colleague Mr. Peston has already said M. Hollande is all mouth and no trousers when it comes to fiscal matters, he knows what side his bread is buttered on. In the great euro poker game it's the Germans that are bluffing, and they're light in the kitty. Where's their extra ten billion?

  • rate this

    Comment number 76.

    Interesting statistics from the OECD

    Tax take as a percentage of employment costs (ie salaries + benefits + employer social security)

    France 49.3%
    UK 32.7%

    So the room for increased taxes in France looks pretty restricted.

  • rate this

    Comment number 75.

    Austerity is a bit like nostalgia - not what it was.
    Controlling the Banks is key to all this - they are the ones benefitting from the ever growing interest payments made on Loans that primarily were to bail them out in the first place. Applies to all the Western Worlds banks - including the Fench. Perhaps Hollande will show some steel - we can but hope.


Comments 5 of 79



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