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France Chooses the Path of Economic Austerity

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 Despite the election of socialist François Hollande to the presidency of the Republic, France, far from breaking with the neoliberal model that has led much of Europe toward disaster, has chosen the path of austerity.

The austerity policies advocated by the European Union – promoted primarily by Germany’s Angela Merkel – the International Monetary Fund and the European Central Bank have led to deadlock. They are politically unpopular, economically inefficient and socially disastrous. Wherever they have been implemented, whether in Greece, Ireland, Italy, Portugal or Spain – without a single exception – they have been unsuccessful, engendering an increase in poverty, unemployment, and public indebtedness as well as leading to the dismantling of the welfare state through the destruction of public services and a drastic lowering of state revenues.


François Hollande’s election to the presidency of the Republic in May 2012 sparked some hope among French citizens for an alternative to austerity policies. But rather than significantly increasing the minimum wage and public investment – measures that would have boosted economic growth – the government of Prime Minister Jean-Marc Ayrault adopted the “Pact for competitiveness” recommended by the Gallois report [1]. This is a pact that has shown itself slavishly devoted to policies that have already demonstrated their ineffectiveness across Europe.

The Gallois report’s Pact for competitiveness.

The government has in fact decided to implement the measures recommended by Louis Gallois, commissioner general for investment. In his opinion the policy would improve the competitiveness of French companies at the international level, stimulate the economy and create jobs. At the same time, President Holland has chosen to reduce the corporate tax by granting a tax credit of 20 billion euros [2].

In order to do this, the Elysée has adopted two measures. As a first step, public expenditure will be reduced by 10 billion euros. This means that public services made available to French citizens will be severely affected, with a direct impact on the quality of life of the most vulnerable elements of the population [3].

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The second measure is the most unpopular: Reneging on his campaign promise, François Hollande has made a decision to increase the VAT, or value-added tax. Indeed, former President Nicolas Sarkozy had already raised the VAT using a differentiated formula in which the middle rate was raised from 5% to 7% and the overall rate from 19.6% to 21.4%. This represents an increase in the VAT of 10.6 billion euros, a cost that would necessarily be borne by French citizens [4]


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One of the first measures taken by the new National Assembly in July 2012 was to remove this VAT hike. Now, three months later, the Socialist government has reversed this decision by again raising the main VAT rates. Thus, beginning the first of January 2014, the overall rate will climb from 19.6% to 20% and the intermediate rate from 7% to 10%. Only the lowest rate will be decreased from 5.5% to 5%. Collectively, these measures represent a tax increase for the French population of 7 billion euros, an imposition that will mainly affect the most vulnerable elements of the population. Indeed, this new tax will account for a loss in purchasing power of 260 euros per person per year, in other words, 25% of the monthly minimum wage [5].

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