Gallois Report Heralds Policy Backtracking as Economic Woes Persist

François Hollande.
Photo: Flickr.com/France in the US

After commissioning a report by Louis Gallois, the former head of European aerospace group EADS, French President François Hollande is set to address French economic woes through suggested provisions lowering payroll taxes and public spending. France’s share of Eurozone exports has dropped three percentage points in one year, from 17% down to 14%, and the country’s unemployment rests at a 13-year high of 10.2%. French economic growth has stalled for the past three quarters.

Searching for innovative ways to boost the French economy six months into Hollande’s first presidential term, the French government reportedly approached Gallois and requested an investigation into the reasons behind France’s economic stagnation. Integral pieces of a “competitiveness pact” identifying reasons for the French economy’s underperformance compared to other European nations such as Germany, the Gallois Report outlined 22 recommendations for improvement upon its release on November 5.

According to the BBC, the report’s propositions included controversial recommendations to slash 20 billion euros ($25 billion) of social contributions paid by employers as well as an additional 10 billion euros ($13 billion) from those paid by workers. Reuters suggest the French government is unwilling to adopt such proposals, reluctant to shift the tax burden onto households struggling with unemployment and the austerity budget. Gallois’ report suggests raising the nation’s value added tax (VAT) and cutting public spending.

The Wall Street Journal reported that just one day after the Gallois Report’s release, French Prime Minister Jean-Marc Ayrault unveiled the recommended 20 billion euros in tax breaks over three years that will reduce labor costs for domestic firms. Spending cuts and an increase in the VAT—initially opposed by Hollande—will indeed take effect. The measures are estimated to reduce French labor costs, among the highest in Europe, by approximately 6%.

The Gallois recommendations have Hollande backtracking on a number of previous objections as he struggles to cut France’s budget deficit to 3% of GDP and improve the nation’s industrial competiveness. Once a strong critic of predecessor Nicolas Sarkozy’s proposed hike in the nation’s value added tax (VAT), Hollande will now preside over a rise in the standard VAT rate from 19.6% to 20%, effective January 1, 2014. Mr. Gallois’ report suggests such measures will deliver a “competitiveness shock” to the French economy, answering the call of 98 French corporate heads who called on the incumbent Socialist government to reduce labor costs in an open letter published last week.

While heeding certain recommendations from this week’s report, The Wall Street Journal noted that the French government adapted others, opting for tax breaks instead of direct payroll tax cuts and spreading the measure over four years as opposed to the recommended one.

An economic turnaround could prove beneficial for Hollande, whose approval rating has plummeted to 36% and who has recently dealt with a series of layoffs at some of France’s largest companies, including PSA Peugeot Citroën.

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