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 19.

    " cuts to public spending , reasonable tax levels for the people who create the job and a long term commitment to improve productivity" -

    Zombie economics x 3.

    Not a shred of evidence to support the zombie theories of "crowding out", "trickle down economics" which is what the first two boil down to. The third being code for "let's lower the worker's wage's to china's level".

  • rate this

    Comment number 18.

    The hard pill was swallowed by the Irish because they as a nation have known hard times within the last generation. Other countries Spain Greece Portugal and Greece are even more deluded than the UK that they are great economic powers. The German's wealth is built on other countries' poverty as they borrowed to buy German products. The whole Euro model cannot work.

  • rate this

    Comment number 17.


    PS Europe need a European Maximum Income!

  • rate this

    Comment number 16.

    Harvard economists just don't get it!


    Trickledown Economics is THE dangerous myth at the heart of the collapse.

    The people have to take control of the financial system & money away from these deadbeat nincompoops.

    Has Hollande the strength to do it is yet to be seen, but let us hope so!

    Europe needs to take capitalism from the uber-rich & give it back to the people!

  • rate this

    Comment number 15.

    France's problem right now is that it is starting from a position where 56% of gdp goes to the public sector, and they haven't run a budget surplus since some time in the seventies. The inplications of yet higher taxes, without some definite reforms of the public sector, will frighten any possible lender.

  • rate this

    Comment number 14.

    6* Europe is no democracy , its run be bureaucrats , who are not even elected - Its going down the drain , unless it becomes more efficient . A low tax economy, with benefits that match is the only way forward. 75% tax rates will get you no where , like the UK's 50% tax, no one will pay it !! Socalist rhetoric for the peasants,while the politicians drive around in their £250,000 bullet proof cars

  • rate this

    Comment number 13.

    At last - some sense! Deficits are affected by the "speed" of the economy as much as anything - this is part of the reason we suddenly had much bigger than planned deficits. Achieve grouth of 2.5% over a decade and without touching anything in tax rates, the progresive nature of tax would increase income by 1/3 at least. Returning to growth is the key, not "I can cut faster than you"!

  • rate this

    Comment number 12.

    The only way to get Euro going again , its dramatic cuts to public spending , reasonable tax levels for the people who create the job and a long term commitment to improve productivity .
    Without all 3 europe will die a slow death ....

  • rate this

    Comment number 11.

    #4 says it well in one way. In reality, the gaps between right and left can be small and even change from time to time. The media find it hard to accept change in politics and peculiarly seem to think positions should be somewhat forever fixed.

    Am glad the folk Steffie spoke to are a bit more open.

  • rate this

    Comment number 10.

    Wishing for growth... and getting it, are different things. You only have to look at the UK example - a 20%+ devaluation of sterling, and still we struggle.

    In this environment, politics will have to take a back-seat. We have major global imbalances and a Europe that is incapable of resolving its difficulties. The result of the French election will have a minor impact on that situation.

  • rate this

    Comment number 9.

    Hollande''s problems are with Brussels not the Francophile IMF!
    The six pack - new so-called “reinforced Stability and Growth Pact (SGP)” agreed late last year requires “excessive deficit procedure” (EDP) - fines for non-compliance kicking a sick economy!
    More austerity and downward spiral for all but Germany?
    This is the reality Hollande faces!

  • rate this

    Comment number 8.

    It seems as though, that the supposed titans of fiance and their minions, the commentators and academics, politicos and bureaucrats entire combined effort, both physical and mental, maybe about as effectual as a Soviet Five Year Plan.

  • rate this

    Comment number 7.

    Stephanie would do well to read up a little on the subject she writes. Apparently Peter Diamond and Emmanuel Saez have published a paper that suggests the optimal tax rate on the highest earners is in the vicinity of 70%... Shock horror!

    Stephanie portrays Hollande as someone who makes irresponsible threats when in reality he is echoing the latest research.

    Skin in the game perhaps Stephanie?

  • rate this

    Comment number 6.

    The result of the French election follows what is becoming a well established pattern, and Angela Merkel would do well to take note. The electorates of Europe are pulling the plug on those who have governed Europe's economy so badly over the last three years. Brown. Zapatero, Berlusconi and now in all probability Sarkhozy. Oh, and you may also note, Mr Barroso, that this is democracy in action.

  • rate this

    Comment number 5.

    France has always looked to others to pay for its profligate lifestyle and work practices. Just look at the CAP supporting uneconomic farmers. I think Hollande's room for manouevre is far less than he thinks. Borrowing more is not an option and higher taxes will prove to be nowhere near as 'profitable' as he thinks. The debate will be overtaken by what happens in the PIIGS. Ignore the rehtoric.

  • rate this

    Comment number 4.

    The reality of the election is that the real difference in policies between the two that will be enacted is minute as neither will be addressing the underlying fundamentals... Meanwhile Christine & the ECB will be really calling the shots.

    Democracy est morte,

    Plus ca change, plus la meme chose...

  • rate this

    Comment number 3.

    How can Europeans retain their current quality of life at a time when we can't count of further debt to artificially prop it up and wealth is moving to developing countries?

    Wealth redistribution might part of the solution: the rich invest, while the poor spend, so wealth redistribution moves capital from assets to consumption. At a time of overcapacity, we need consumption, not asset bubbles.

  • rate this

    Comment number 2.

    M. Hollande need only look next door and across the Channel to confirm his need to go growth. Even the high priests of finance question the absolute identity of cutting budgets equals cutting deficits. The so called 5% contingency for public spending is a new covert cut by the Coalition reflecting the failure of austerity. Perhaps M. Hollande will lead the way to the ECB supporting growth not cuts

  • rate this

    Comment number 1.

    Somebody needs to point out to the German electorate that they have implemented less than half of their German austerity measures.

    Perhaps that will stop them being so tight, which is what is driving Angela.

    She's done a good balancing act so far with 2013 in mind but a big row with France which she loses will unstitch some of that.


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