Hollande's Treasure Hunt

Francois Hollande has it tough. Barely five months after beating out incumbent Nicolas Sarkozy, his approval rating has dropped to 43% from 54%–one of the worst drops in modern French history.[1] France’s unemployment rate has held steady around 10.2%[2] since his election, and issues in the Eurozone continue to worry the country. Prior to Hollande’s election, Nicolas Sarkozy, the former President, had teamed up with German Chancellor Angela Merkel to form a Franco-German power bloc, trying to add some sense of leadership to the European political mess. However, much of this teamwork was focused on asking other countries to take more austerity measures and become fiscally responsible. Hollande, for whom “austerity” is a dirty word, has been distancing himself from Merkel’s calls for spending cuts and greater political integration within the EU.[3] Rather than cutting spending, Hollande’s response, led by his Prime Minister Jean-Marc Ayrault, has been to raise taxes on wealthy individuals and businesses. An additional gap-filling €7.2bn was expected to be generated from “extra levies on those who pay the wealth tax, higher inheritance tax, an extra 3% tax on dividends, heavier charges on stock options, higher taxes on financial transactions, banks and oil firms, and an extra 5% tax on big companies,” partially offset by not raising the VAT.[4] At the same time, public spending is not expected to go down. Government expenditures in France were at 55.9% of GDP, the second highest in the EU, and should be expected to continuously rise if GDP growth does not accelerate.[5]


While Hollande’s proposed tax increases on businesses leave much to be desired, his main political weapon is increasing taxes on the wealthy. A 75% marginal tax rate for incomes over €1mm per year was guaranteed to gain him some political goodwill among his constituency. However, it seems that Hollande has forgotten a very interesting fact of geography: France is surrounded by tax havens. Andorra,[6] Liechtenstein,[7] Luxembourg,[8] Monaco,[9] San Marino,[10] and Switzerland[11] are all easily accessed from France, and levy little to no tax on capital gains and individual income. While certain steps have been taken by organizations such as the OECD[12] to limit the use of tax havens[13], they will still most likely be very attractive places to hold large sums of money and financial assets. For the wealthy of France, moving—financially, at least—to these countries seems like a no-brainer, even with taxes on assets moved out of France in full effect. At this point, even the UK would be an appealing place to move assets, if accidentally jogging out of your country is too much of a burden to deal with. Furthermore, all of these countries are culturally similar enough to France that cultural shock would be minimal or nonexistent for any wealthy French who physically move there. These countries have similar languages, climates, food, and time zones, and the wealthy who move there have easy access to any services or luxuries which they were used to in the past, such as schooling for their children or close proximity to vacation destinations.


Compare this to the case of the wealthy in the United States. Eduardo Saverin, who made his billions from Facebook, renounced his American citizenship to reside in Singapore.[14] Overall, the number of wealthy Americans expatriating has doubled since 2009.[15] If we consider Saverin to be somewhat representative, that means that there are many wealthy Americans who are willing to endure some culture shock in order to relocate their money.  Hollande’s plan is even stricter than the plan Americans are running from, and far easier to avoid. After all, if ever more wealthy Americans are willing to brave the hot and sticky climate, foreign language, and new cultural experience of moving to Singapore, it should be expected that the wealthy of France would be thinking along similar lines. Given that it is even easier for the French to flee these taxes than it is for the Americans, a fairly large expatriation should be expected. As such, Hollande’s plan may have far less money available to tax, and thus he should not expect to gather nearly as much tax from the wealthy as previously projected.


These new income taxes, combined with further taxes on basic transactions, will likely hamstring France further. If dividends and stock options are being taxed further, kiss start ups goodbye. An extra 5% tax on “big” companies will give large multinationals pause when they think about further French expansion. Hollande has made the same mistake that countless politicians have made in the past: thinking of pools of capital and financial transactions as a bundle of goodies from which money can be extracted like oil from a well, rather than instruments for businesses to use like any other tool.


Beyond a misplaced desire for economic catharsis via taxation, Hollande’s policies fail to address a major, constant problem with the French economy: labor. France is well known for its frequent strikes and protests over employment and retirement policies. It is incredibly hard to fire a worker once hired. Firms, rather than just not firing people, have adapted, and simply stopped hiring. This has hit young workers the hardest, making it very hard to break in to the work force. Youth unemployment in France is more than double the overall unemployment rate,[16] and unless labor restrictions are liberalized, we should expect it to stay that way. In times of uncertainty, firms try to reduce risk, particularly in hiring. If firms could hire and fire as they pleased, unemployed individuals would be more likely to be given a shot at employment. If the new worker is not pulling his share, he is gone. If the new worker is indispensable, the firm has just gained a valuable asset. At the same time, things are better for the workers themselves; they are off the public dole while employed, and they gain experience rather than stagnating. Under the current rules, France’s high unemployment rate is causing a self-reinforcing cycle of competitive impediment, with labor costs growing 28% since 2000 compared to 8% in Germany, the country’s biggest trading partner.[17]


Things will be difficult for Hollande, no matter how he proceeds in the future. In order to have a chance at turning France around, he would have to push for policies which his already-unhappy constituency would oppose. If he realizes the change in direction needed, and plays his political cards correctly, this could be his China, a la Nixon. Given his declining popularity, however, it seems more likely that he will avoid politically risky moves. Without an economically stable France backing up diplomatic pressure from Germany, we could very well see accelerating economic problems in Europe.

[1] http://www.guardian.co.uk/world/2012/sep/23/francois-hollande-popularity-plummets-election?newsfeed=true

[2] http://goo.gl/uatXY

[3] http://www.economist.com/node/21559636?zid=309&ah=80dcf288b8561b012f603b9fd9577f0e

[4] http://www.economist.com/node/21558264?zid=309&ah=80dcf288b8561b012f603b9fd9577f0e

[5] http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/General_government_expenditure_statistics

[6] http://en.wikipedia.org/wiki/Andorra#Economy

[7] http://en.wikipedia.org/wiki/Liechtenstein#Taxation

[8] http://en.wikipedia.org/wiki/Economy_of_Luxembourg

[9] http://en.wikipedia.org/wiki/Monaco#Tax_haven

[10] http://en.wikipedia.org/wiki/San_Marino#Taxation

[11] http://en.wikipedia.org/wiki/Taxation_in_Switzerland

[12] http://www.oecd.org/ctp/exchangeofinformation/luxembourgmakesprogressinoecdstandardsontaxinformationexchange.htm

[13] http://www.swissinfo.ch/eng/swiss_news/Cabinet_moots_further_easing_of_banking_secrecy.html?cid=33570610

[14] http://blogs.marketwatch.com/thetell/2012/09/11/exiles-on-main-street-when-the-going-gets-tough-some-rich-get-going/

[15] http://www.cnbc.com/id/47599766/The_Mass_Migration_of_the_Super_Rich

[16] http://www.businessinsider.com/a-guide-to-the-horrible-youth-unemployment-mess-in-europe-2012-2?op=1

[17] http://www.economist.com/node/21563303?zid=309&ah=80dcf288b8561b012f603b9fd9577f0e

Leave a Reply

Your email address will not be published. Required fields are marked *