Hollande confirms Valls as PM, stands by pro-business pact

CNBC With Reuters
French election results highlight deep malaise: Pro

French President Francois Hollande said on Monday he had named Interior Minister Manuel Valls to be his new prime minister, replacing Jean-Marc Ayrault, in a government reshuffle triggered by a rout for his Socialists in local elections.

Addressing the country in a short televised speech, Hollande said a key objective for the new government would be pursuing the so-called "responsibility pact" to lower employers' costs in order to spur job creation.

But in a new move, he also said he would lower taxes and worker contributions and said France would have to persuade EU partners to take into account its efforts to boost the economy when examining its commitments to Brussels.

Nicholas Spiro of Spiro Sovereign Strategy described Valls as "Sarkozy-lite," a reference to Hollande's predecessor, Nicolas Sarkozy.

"Valls is important because he can improve the politics of economic reforms, as he would be viewed as a more credible prime minister," Spiro said. "He is a Sarkozy-lite: he is tough on crime, tough on immigration. He is an economic reformer, which is obviously very important as far as the markets are concerned."

Spiro added, "The real positive about Valls is that France would be getting a premier who is popular, credible, still relatively young and with a lot of charisma."

Losses amid growing discontent

The socialist party's losses in the local elections follow growing public discontent in France with the economic track record of Hollande, whose government has seen unemployment stuck at around 10 percent. The budget deficit stood at 4.3 percent of gross domestic product in 2013.

The far-right National Front, led by Marine Le Pen took control of 11 towns, mainly in the south, while around 150 towns went to the center-right main opposition UMP party, the former party of Sarkozy.

French President Francois Hollande
Thibault Camus | AFP | Getty Images

Analysts were doubtful that a reshuffle would solve the problems facing France and Hollande's government.

"I think it's really rearranging deckchairs on the Titanic. Until they sort the economy out, nothing else is going to fix the major reason why the French are so unhappy with the government," Rainbow Murray, associate professor at Queen Mary University of London, told CNBC.

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'Thin' room for maneuver

Hollande is facing embarrassingly low popularity levels. In an attempt to woo businesses, the president unveiled a "responsibility pact" aimed at cutting labor costs and taxes to spur job creation.

But many believe structural reform in France is moving ahead too slowly. GDP rose by a tepid 0.3 percent last year. Analysts said that a reshuffle is unlikely to materially change Hollande's government policy as the president has little room to make concessions.

"The government could show it is receptive to voters' concerns by, for example, announcing a cut in income tax for… low income households. But on that I think it is risky for two reasons. One, the room for maneuver on the fiscal side is very thin and second, the economic impact is uncertain," Maxime Alimi, economist at AXA Investment Management, told CNBC in a TV interview.