Economic jolts cut short Hollande's honeymoon

World Focus: Pledge to avoid higher taxes may be broken following collapse of domestic car market

Paris

The tough economic and financial choices are beginning to erode the popularity of President François Hollande as he wrestles with the conflict between campaign promises and reality.

The President and his Prime Minister, Jean-Marc Ayrault, face anger and jibes from the centre-right and the hard left as they try to square the circle of deficit reduction, economic growth and respect for European Union commitments. According to one poll, Mr Hollande's approval rating sank by five points this month to 53 per cent – a time when newly elected French presidents are still traditionally enjoying a honeymoon with public opinion.

Mr Hollande faces a variety of problems before the traditional political "truce" in August. Peugeot-Citroen has announced 8,000 job cuts; emergency legislation to increase taxation on the wealthy has proved more troublesome than expected; and the President's pledge to implement the EU treaty on fiscal discipline without changing the constitution has stumbled into a legal and political minefield.

The new government faces further tough choices in September when it will have to explain how it intends to cut spending to meet the EU target of a 3 per cent of GDP budget deficit next year. The crisis at Peugeot-Citroen is Mr Hollande's most challenging test so far. The firm says it is paying the price for maintaining most of its production in France. Its sales, traditionally dependent on the domestic market and southern Europe, have collapsed.

But the President said the cuts are "unacceptable" and must be "renegotiated". His "minister for productive recovery", Arnaud de Montebourg, has accused the firm of getting its strategy wrong and paying excessive dividends to investors, including the Peugeot family. He is expected to produce a car-industry recovery plan in coming days, including measures to persuade consumers to buy new, ecologically friendly cars.

The crisis has forced many figures on the French left to face a fact that they previously denied or minimised. High social charges on employers means it costs an average of €35 (£27) an hour to employ a car worker in France, compared with €10 in Eastern Europe.

The government is therefore considering a U-turn on its campaign pledge to avoid increasing taxes on the working and middle classes. The "CSG", an extra form of income tax that pays part of the cost of the welfare state, may be increased to reduce the burden on industry. The government confirmed yesterday that it was "reflecting intellectually" on this possibility.

Emergency legislation has been pushed through parliament to more than reverse former President Nicolas Sarkozy's tax breaks for the wealthy.

Legislation has also been introduced to fulfil Mr Hollande's campaign promise to increase income tax, temporarily, to 75 per cent on income over €1m. Some aspects of this legislation face a constitutional challenge on the grounds that it goes beyond taxation and amounts to "confiscation".

Taxman nets €65m from 'Ibra' deal

The transfer to Paris St Germain this week of the Swedish star striker Zlatan Ibrahimovic will be a high-scoring boost to French state finances.

To lure "Ibra" away from AC Milan, PSG's Qatari owners have promised him a salary after tax of €15m a year. President François Hollande's new 75 per cent tax on income over €1m means that the striker's pre-tax pay will be around €57m.

Bonuses and social charges of gross salary could, it is estimated, take the total annual cost of employing Ibrahimovic to €80m – of which €65m will go to the French taxman.

John Lichfield

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