Thursday, March 01, 2012
Hollande takes on London
The Socialist frontrunner to the presidency is on a damage-control trip following a series of statements on markets and wealth creation. The self-described “Mr Normal” has sought to win over the French electorate by presenting himself as the humble antidote to flashy Nicolas Sarkozy.
Trouble is, Sarkozy is playing the same game. Two weeks ago the incumbent President proclaimed himself the “candidate of the people” and vowed to defend French interests against markets by introducing a Financial Transaction Tax.Hollande, perhaps sensing that Sarkozy is treading on his home turf, has upped his rhetoric.
On Monday night, he denounced the “indecent wealth” of French CEOs, and proposed the introduction of an eye-watering 75% tax rate on annual salaries above €1million. The announcement came in the middle of an unrelated debate on unemployment, prompting accusations of improvisation. Sarkozy claimed that the statement smacked of “amateurism”, while Budget Minister Valerie Pecresse denounced Hollande’s “fiscal inflation”, pointing out that “he invents a new tax every week, without proposing any budget savings”. Hollande has a record of market and wealth-bashing. The Correze deputy stated, twice, that he “didn’t like rich people” in 2007, and announced at his official campaign rally two months ago that his “real enemy was finance”.
On Wednesday, he sought to make amends and soothe market and City of London fears. At a meeting with Ed Miliband he pointed out that “the Left was in power for 15 years [under Mitterrand] during which we liberalised the economy and opened markets to finance and privatisation. There is nothing to fear”.
Is that true?
Well, tellingly, Hollande did not meet one City representative during his time in London.
The 75% tax rate is just the latest in a string a proposals designed to hit the richest hardest. Le Monde estimates that under Hollande’s programme, wealthy citizens would pay almost €12bn in tax. Alongside the 75% rate, which will hit between 15,000 and 20,000 households, Hollande calls for a €10,000 limit on tax relief, a hike in inheritance tax, and a 45% tax rate on incomes above €150,000. The 75% rate outstrips current EU tax levels, the highest of which is 56.5% in Sweden. Frightening French CEOs is unlikely to encourage investment, and fuels fears of an exodus of wealthy French nationals. As Nicolas Sarkozy warned this morning on French radio, “the rich will have no reason left to stay”.
Aside from the domestic political considerations, the move also raises serious questions about the viability of tax harmonisation within the eurozone, something the current French and German governments are pushing for in an effort to improve competitiveness through economic policy convergence. Although the initial proposals focus on corporation rather than personal tax, it is difficult to see how such disparate rates of top personal tax rates would not affect countries' competitiveness within the eurozone.
Hollande’s shift to the Left puts him at odds with other European leaders. Cameron and Merkel have snubbed him, while Miliband’s endorsement was lukewarm. Although Hollande stated that “we need Great Britain to take part in Europe and the adventure of construction”, and argued that “European progressives need to secure the success of the next generation”, Miliband stressed that he would not seek to increase tax rates on the highest earners, or introduce a financial transaction tax. Meanwhile, German Social Democrats have distanced themselves from the 75% tax rate. More than 500 UK business leaders called on George Osborne to cut the "damaging" top tax rate today.
European heads of government will hardly be reassured by the Socialist Party’s recent prevarication over the ratification of the EU’s permanent bailout fund, the European Stability Mechanism. The party’s refusal to endorse the fund (20 deputies voted against, many others abstained) is seen in Europe as illustrative of the Socialists’ unpredictable policy-making. Hollande’s oft-repeated pledge to renegotiate the fiscal treaty does not inspire much confidence in Brussels either. As a high-ranking Brussels official told Le Monde two days ago “nobody really knows what Hollande stands for”.
Either way, Hollande's off the cuff announcement marks another twist and turn in what is becoming a fascinating contest with significant repercussions not only for France, but Europe as a whole.