Peter Jones: French woes are a warning for SNP

Fran�ois Hollande faces a difficult challenge in dispelling the idea that the EU is dictating policy. Picture: Reuters
Fran�ois Hollande faces a difficult challenge in dispelling the idea that the EU is dictating policy. Picture: Reuters
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Hollande’s local difficulties with the EU do not hold out much hope for a sterling currency zone, writes Peter Jones

How swiftly François Hollande’s dreams of a socialist future for France are fading. The cause? Poor economic management, certainly, but also heavy pressure from the European Union. And what is happening there – and indeed in every EU member state, but especially those in the eurozone – points up pretty forbidding lessons, and a big flaw, in the SNP’s plans for independence and a sterling currency zone.

The troubles of the eurozone – a struggling currency and economic stagnation – don’t need rehashing here. To try and achieve both currency stability and growth, Europe’s leaders agreed in June 2010 a ten-year programme called Europe 2020. Everybody, non-eurozone member states included, signed up to raising employment levels from 69 per cent to 75 per cent, increasing spending in research and development, reducing carbon emissions, increasing the number of young people in training, and reducing the number of Europeans in poverty by a quarter.

Interwoven with this is the Treaty on Stability, Convergence and Growth, signed by all 27 EU states, except for Britain and the Czech Republic. This aims eventually to get all EU member state budgets to either balance or be in surplus, eradicating one source of instability. It also aims to improve the competitiveness of laggard states, mainly the southern European ones, reducing another major imbalance. It all sounds fine in theory, but it is devilishly hard to make it work in practice.

The biggest problem is political, because it involves the European Commission telling national governments what to do. Eurocrats say it is advisory, but as penalties for failing to achieve targets are mooted, the advice comes with a big stick.

Just over a year ago, Mr Hollande became French president. He immediately implemented a big election bribe – reducing the retirement age back to 62 from the 65 years, to which his predecessor Nicolas Sarkozy had raised it.

This was supposed to push older people out of the labour market to create vacancies for younger people. The policy has failed spectacularly – youth unemployment has risen from 25 per cent when Mr Hollande took power to 27 per cent now, while overall unemployment, after 24 months of consecutive rises, last week hit a new record of 3.3 million, a rate of close to 11 per cent.

His plan to hike the top rate of income tax to 75 per cent on earnings of more than €1 million has been struck down by the French courts. They ruled that no more than 66 per cent of citizen’s income can be taken by the state, still pretty steep, but not before quite a few wealthy people, including film-star Gerard Depardieu, left the country.

All this has left the French economy going backwards rather than forwards and Mr Hollande, after scandals such as his budget minister in charge of cracking down on tax evasion being discovered to have a secret Swiss bank account, is more unpopular even than the much-disliked Mr Sarkozy.

This is all bad news for the EU project. The French economy is about 21 per cent of eurozone GDP. If it doesn’t grow, or – worse – shrinks, its deficits will rise and its banks will be under pressure, adding to the eurozone’s woes. More importantly, from the EU perspective, it means France will miss its target of getting the government deficit down to 3 per cent of GDP this year.

So, the EC has given France an extra two years to achieve this, but has demanded deep economic reforms. Last month, I saw Mr Hollande and EC president José Manuel Barroso give a joint press conference in Brussels on one stage of this process.

Mr Hollande, who was windy but a bit more impressive than I expected, was at great pains to say that various labour market reforms, which are unpopular with the powerful French unions and the public sector workforce, were being done because France had decided they were “necessary” and not because of anything the commission had said.

Last week, after the commission published more detail of what it expected of France, he upped the rhetoric, saying that the commission could not “dictate” to France how it should run the economy.

To French voters, however, it may well look exactly like that. The commission thinks that France should raise the retirement age (reversing Mr Hollande’s reduction), make the pension system less expensive (employees should pay in more and get less out), make the wage system more flexible (implying France’s high minimum wage levels should be reduced), and open French markets, particularly the energy and rail sectors, to competition.

This looks guaranteed to enrage the employees of the French state-owned train operator, SNCF, which has an effective monopoly and some of the most generous employment terms available anywhere in Europe, and also those of 84 per cent state-owned EDF, which is a near monopoly electricity supplier in France.

We will see how this pans out later this year but, in the meantime, it has some pretty stern lessons for the Scottish Government and its hopes of a sterling currency union. While the EC does not go so far as to tell eurozone member states what tax rates to set, it doesn’t shirk from seeking pretty demanding policy action on welfare systems and economic management.

It also points out a glaring gap in the SNP sterling zone proposal – there are no plans for an independent (of the two governments) counterpart to the commission to review, comment upon, and issue recommendations for how either the Scottish or rest of UK governments should run their economies. The Scottish Government’s Nobel-laureated fiscal commission talks about establishing a body equivalent to the UK government’s Office for Budget Responsibility in an independent Scotland, but that’s only to lend credibility to Scottish economic management.

The EU experience suggests that some sort of two-state supra-national body is required. For if the two governments disagree over economic policy to the extent that one sincerely believes the other is pursuing a profoundly damaging course, who would arbitrate? Would a UK economic referee be needed? Or perhaps the EC might do it – that would be really popular south of the Border. If a plan for fiscal stability and deficit reduction was agreed, would there be penalties for breaching it? Who would enforce these penalties?

It’s hard to imagine a solution to these questions. But one is needed, otherwise the sterling zone plan won’t get off the drawing board.