France: Hollande shakes up cabinet, investors see pro-reform government positively
August 27, 2014
President François Hollande decided to reshuffle his cabinet on 25 August against a backdrop of stalled economic growth and dissent over the government’s economic policy. President Hollande’s decision to dissolve the government was triggered by recent GDP data, which showed that the French economy disappointingly stagnated for a second consecutive quarter in Q2. This is the second time Hollande has reshuffled his cabinet this year and the fourth during his administration. Nonetheless, investors see the shake-up as positive.
Growing discontent regarding France’s economic performance and increasing internal divisions between the pro-reform wing of the government and ministers who are more aligned with the left wing of the ruling Socialist Party (PS) prompted Industry and Economy Minister Arnaud Montebourg and two other ministers to publicly criticize the government’s belt-tightening economic policies and announce their resignation. Montebourg’s criticism was clearly incompatible with his continued participation in Hollande’s administration and this propelled Hollande to demand that a new government be appointed.
A day after dissolving the cabinet, President Hollande asked Prime Minister Manuel Valls to form the new government and, in a clear sign that he would go with a pro-reform platform, Valls appointed former banker and economic adviser Emmanuel Macron to the position of Minister Industry and Economy. Valls decided to maintain other key ministers from the previous cabinet: Finance Minister Michel Sapin, Foreign Minister Laurent Fabius and Jean-Yves Le Drian in the Ministry of Defense. With these moves, Paris sent a clear message to Brussels that the government remains committed to reform and thus gained further leeway to accomplish fiscal targets in return.
From the perspective of investors, the departure of the more left-leaning cabinet is seen as positive. Market analysts have suggested that the new cabinet is likely to lean toward the center, which should be welcomed by investors. Moreover, analysts agree that the new government should work to strengthen Prime Minister Valls’ leadership position in order to act as a single voice for the government.
Risks, however, lie in that the new government is likely to lose support in the parliament. Since Manuel Valls was nominated as PM in March of this year, discontent had been growing among lawmakers from the Socialist Party resulting in less political room in which to maneuver. The initial nomination of Montebourg as Economy Minister helped the government to secure support from key members of parliament. However, with his departure, it is likely that some lawmakers will withdraw their support from the government and defect from the majority. This, in turn, could make any government initiative to implement further reforms more difficult. Analysts and political observers recognize that the political situation will remain tense for the months to come, particularly during the mid-October talks on the 2015 budget.
Author: Ricardo Aceves, Senior Economist