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The Globe and Mail

In France, a sad state of affairs goes beyond the president's office

The François Hollande affair amused, but failed to shock, the Italians. It amused them not because the French president was allegedly cheating on his partner (an accusation he has not denied); it was how he conducted the liaison dangereuse.

The tabloid Closer said the leader of the world's fifth-largest economy would arrive at her apartment building wearing a helmet, visor down, on the back of a scooter. Silvio Berlusconi showed a bit more class with his mistresses. He used luxury cars.

What amused the Italians even more, to the point of schadenfreude, was that Mr. Hollande was apparently diddling while Paris burns. Italy, the euro zone's third-largest economy, behind France, is no longer billed as the country bent on destroying the entire European project.

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"France is the real sick man of Europe," Holger Schmieding and other economists at Germany's Berenberg Bank said in a recent report.

Mr. Hollande was right to brush off the stories and endless questions about his romances as a "violation of his private life." But the affair's disclosure did not make his economic fix-it job any easier. Scooter boy has become the object of ridicule. It's also bad PR to get caught indulging in illicit pleasure when you're asking your own people to make sacrifices to save the economy.

France is not an economic disaster, in spite of its best efforts to beat the Italians in the race to the bottom. But it's no better than Italy on many measures, and worse in others.

Its forecast growth rate in 2014, at 1 per cent or less, is similar to Italy's. Ditto its unemployment rate (France's is 11 per cent, Italy's 12.7). While France has a smaller debt to gross domestic product ratio than Italy (90 per cent compared with 128 per cent in 2013), Italy fares much better on the budget deficit front. And, unlike France, Italy is running a fairly robust primary surplus, meaning government revenue exceeds spending once interest payments on the debt are stripped out. Incredibly, Italy's socialist state is less top-heavy. There, government spending was equivalent to 49 per cent of GDP in the last fiscal year. France's was almost 55 per cent.

Of course, neither economy is competitive, but it appears France's is getting uncompetitive faster than Italy's. That's quite a turnaround. When the financial crisis erupted in 2008, the common belief was that the combination of German and French industrial might, leadership in some sectors (such as France's vast nuclear energy developments), world-class infrastructure, top-end universities and stored wealth would shield Europe from the nastiest blows. It didn't quite work that way. It is Germany that is pulling the euro zone out of recession. France became part of the problem, not the solution.

France cannot afford its economic model, which is based on high taxation and even higher spending. Mr. Holland's predecessor, Nicolas Sarkozy, tried to fix that, bringing a dose of Thatcherism to the French economy. He failed. Mr. Hollande swept into power in 2012 with a promise to blunt the sharp edges of austerity. That failed, too. Almost every one of France's economic indicators, from the jobless rate to unit labour costs, went in the wrong direction in the past two years. Over the winter of 2012-2013, France was back in recession.

"For many in Europe, France deserves the dunce's cap," Oddo Securities' chief economist Bruno Cavalier said in a December note.

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Mr. Hollande, the great social democrat, is now shifting his stance. He has declared the French state burdensome and unwieldy. Last month, he vowed to "stamp out excesses and abuse" in the welfare system and professed that he was "certain that we can do more by spending less." This week, he in effect admitted that the policy of using a gusher of state spending to create jobs had failed.

His new strategy is to make it more attractive for businesses to create jobs. He is doing so with a promise to remove €30-billion ($44.5-billion) from labour charges, such as the employers' social contributions that finance family allowances. While some of these cuts had already been announced, it is a step in the right direction. To finance the lower labour charges, he plans to cut public spending by €50-billion between next year and 2017. The details and timing were vague and there is no doubt the spending cuts could dampen GDP growth.

The risk to Mr. Hollande's plan is as much political as economic. The French do not take to reform or adjust to spending cutbacks easily. Mass protests and strikes are possible and it's not like Mr. Hollande has a rock-solid support base. His popularity is at about 25 per cent and has recently been as low as 20 per cent. With his Socialists in the popularity tank and the centre-right in disarray, the far-right, anti-euro Front National party, led by Marine Le Pen, is gaining support (she placed third in the 2012 elections, with 18 per cent of the vote). "I don't expect anything from the European system except that it explodes," she told reporters last week.

With the political ground shifting fast under his feet, Mr. Hollande's belated reform efforts are bound to be tortured and his job will be made all the harder by the scandal surrounding his romantic life. France's sick man status will endure.

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