GO
Loading...

French Charm Offensive: Too Little, Too Late?

Joel Saget | AFP |GettyImages

A number of embarrassing U-turns by François Hollande have made him the object of ridicule, with critics arguing he is a spineless leader who has given in to pressure from a powerful pro-business lobby.

His opponents cheered his most recent decision to drop a plan that would cap executive pay, a move which was widely viewed as an attempt to placate business leaders. But analysts warn that the move, which followed another high-profile change of heart on a proposed 75 percent top tax rate on high earners, will not be enough to restore entrepreneurs' confidence in the country.

Hollande decided to drop the plan that would cap executive pay in the private sector last week in an effort to show support for businesses and job creation at a time when confidence in French politicians has hit rock-bottom.

(Read More: S&P: France Must Deliver Promised Budget Cuts)

The U-turn comes in the midst of dwindling consumer confidence, which hit its lowest level since July 2008, according to data released on Tuesday. The country is also faced with record unemployment and a return to recession for the second time in four years.

"There is a real lack of confidence in the government and that lack of confidence explains why economic growth is negative in the country now and has been for the last six months. I think the decision has been made because they want to catch back the confidence of the entrepreneurs, they hope that it will be enough – but I am not sure it will be," Bruno Jeanbart, director of political studies at opinion pollster Opinionway told CNBC.

Hollande's government is battling to overturn an image of being anti-business after corporate chiefs lashed out at its 75 percent super-tax plan and fought back at a plan last year to raise capital gains taxes.

Jeanbart said the drop of the cap on executive pay along with the overhauling of the government's super-tax plan, which is applied to companies rather than employees over 2014 and 2015, is too little too late.

(Read More: France Still Business Friendly, Foreign Minister Argues)

"The program won't be seen as threatening to the entrepreneurs, but it won't be enough to restore their confidence. They are pretty upset with other decisions and how the government is running the country, the level of taxes for the companies are still high," he added.

Jeanbart also said that while the decision appeases businesses, voters will be left even more disillusioned, as Hollande veers further from the promises he made in his election campaign.

"It's not just this U-turn that is embarrassing, but it is the general U-turn that the president and the government made on their election promises. It is very bad for the credibility for the government in France, people have no confidence in politicians," he said.

(Read More: 'Time is Running Out,' Asset Manager Tells Hollande)

Philippe Waechter chief economist at French asset management firm, Natixis said the move marks a shift in the government, as they have realized the main weakness in France is its lack of investment.

"At the very beginning there was a kind of war between companies and Francois Hollande and the government. But now things have changed a lot, and for me the interpretation we can have on this point is they have changed their mind on companies. They feel now they have to work with companies and managers, they don't want to constrain them too much on wage settlement," said Waechter.

"At the very beginning every measure taken by the government was focused on the consumer, the wage earner, now they have realised the main weakness in France is investment, so they are trying to improve companies' situation.

"They have said we want more transparency in the way you settle your income but we will not put a very strong law behind that, because we want to work with you and we want a friendship relationship," he said.

(Read More: France in 'Free Fall' as Fund Managers Short Bonds)

Maxime Alimi, macro strategist and euro zone economist at Axa Investment Managers was more upbeat. He said from an economic point of view it is difficult to quantify what the impact on growth will be, but it should improve sentiment domestically and abroad, which is poor at the moment.

"The broad consensus is that France is lacking in appetite in structural reforms at a time when it needs it and other neighboring countries are doing it, so I think in that context, dropping this salary cap is a good thing," he said.

"Maintaining that positive sentiment towards France as an investing destination is an important thing. Historically France has been a strong receiver of foreign direct investments, especially compared to other large economies in Europe,"

Alimi said it is important to take measures to show that France is not against business and adding such a salary cap would have made things worse.

By CNBC's Jenny Cosgrave; Follow her on Twitter @jenny_cosgrave.

Contact Europe News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Europe Video

  • A yes vote in the upcoming Scottish independence referendum could lead some insurers to move their headquarters to London, says Mark Nicholson, associate director at Standard & Poor's Rating Services.

  • The U.S. Federal Reserve remains data dependent and will not bow to hawks, says Mark Haefele, global chief investment officer at UBS, as Janet Yellen continues to make the argument that there is slack in the labor market.

  • European shares closed lower on Friday as tensions in Ukraine flared up once again. It comes after stocks fluctuated as U.S. Federal Reserve Chair Janet Yellen spoke about the labor market in Jackson Hole, Wyoming.