French Prime Minister Moves to Dissolve Cabinet

Dan Bilefsky and Liz AldermanNew York Times

PARIS -- French politics were thrown into disarray Monday as Prime Minister Manuel Valls said he would dissolve the government after a divisive battle in his Cabinet over whether belt-tightening measures supported by President François Hollande were impeding France’s stagnant economy from recovering.

The political crisis reflected a widening backlash against austerity not only in France but in Europe more broadly, as well as deepening tensions between France and Germany, which continues to advocate budget cuts as necessary to restore confidence in the eurozone.

The French media reported that Valls had threatened to resign Sunday unless Hollande ordered a shake-up of the government after his outspoken economy minister, Arnaud Montebourg, insisted that budgetary austerity had gone too far and was hobbling France and the eurozone.

“It’s either him or me,” Valls said to Hollande, according to the French newspaper Le Monde.

Montebourg suggested over the weekend that Hollande had overreached in pushing austerity - including a plan to slash spending and raise taxes - to reduce the nation’s deficit, and that if the French government did not shift course, it risked losing support to populist or extremist parties.

“The priority must be exiting the crisis, and the dogmatic reduction of deficits should come after,” Montebourg said in an interview published in Le Monde. In a speech over the weekend, Montebourg added that he had asked Hollande for a “major shift” in economic policy to favor growth, adding, “Promising to get the economy going again hasn’t worked.”

He also took direct aim at the policies of the German chancellor, Angela Merkel.

“We need to raise the tone,” he said in the interview in Le Monde. “Germany is caught in a trap of austerity that it is imposing across Europe.”

A new government is to be formed Tuesday, and Valls is expected to remain as prime minister. After raising dissent from within the government, it seemed likely that Montebourg would be dropped from the Cabinet.

Last week, Hollande acknowledged the problems his government faced, saying in an interview with Le Monde that austerity policies the country had been compelled to follow to meet the eurozone’s budget deficit target had made it near impossible to achieve a recovery after six months of zero growth and more than a year of weak economic activity.

As a result, France will no longer try to meet a deficit reduction target this year, he said. Even so, growth is so weak in France, which has the second-largest economy in Europe after Germany, that it is unlikely to rebound any time soon, he added.

It was the most strident repudiation yet of the policies that Merkel and the so-called troika of lenders - the European Commission, the International Monetary Fund and the European Central Bank - insisted countries follow at the height of the crisis, when there was a palpable danger that the 18-member euro monetary union might break up.

That threat has diminished, but requirements that even countries facing a recession slash spending and raise taxes to meet fiscal targets have shifted the European debt crisis into a new phase: one of prolonged anemic growth and high joblessness.

On Monday, Merkel was in Spain to meet with Prime Minister Mariano Rajoy, a visit aimed in part to shore up support for her austerity policies. Asked about events in France, she told reporters that she wished Hollande success with his reforms but declined to comment on French domestic politics.

In early August, after Hollande told French reporters that a course correction might be needed in Europe, a German government spokeswoman, Christiane Wirtz, crisply commented that the German government “sees no reason to undertake any correction in its policies,” and certainly not because of “rather glib statements from Paris.”

The tensions at the core of the eurozone come after years of admonishments from Germany to rein in runaway debts and deficits that many of its neighbors now blame for making it harder, rather than easier, to mend tattered balance sheets and to reduce high unemployment.

The eurozone now faces the threat of sliding back into its third recession in five years, after the currency bloc failed to grow at all between April and June. By contrast, the U.S. economy is recovering and unemployment is declining.

The government shake-up in France - the second since Hollande took over the presidency in 2012 - exposed the challenge the president faces from the left wing of his party as he struggles to revive France’s flat economy.

Valls was initially a relatively popular prime minister, but his support has diminished as the economy has faltered. Hollande has one of the lowest popularity ratings in decades. According to an IFOP poll published Saturday by Le Journal du Dimanche, Valls’ approval rating has plunged to 36 percent and only 17 percent of the French approve of Hollande’s stewardship of the country.

Hollande took office two years ago, and the French economy has been stagnant since, with unemployment above 10 percent. Opinion polls show that four out of five French people are unsatisfied with Hollande’s handling of the economy. But the straitjacket of the European Union’s austerity policies has left the government little leeway to employ the kind of growth measures that many economists say are necessary to restore demand.

While the United States has rebounded since the worst of the economic crisis, a much-heralded European recovery has failed to emerge. With the Continent’s three main engines - Germany, France and Italy - sputtering, weakness in the EU, with its more than 500 million consumers and one-quarter share of world gross domestic product, threatens to undermine the global outlook.

The turmoil in France’s Socialist government comes as the center-right is buffeted by a leadership crisis and as the far-right National Front is gaining ground and seeking to fill the electoral vacuum.

Elsewhere in Europe, countries like Greece and Portugal, which adopted stringent austerity measures as conditions for receiving international bailouts, are still struggling to recover. Spain, whose government last year pledged to ease up on austerity, is only starting to see the return of some growth. In Italy, where the economy recently slid back into a recession, Prime Minister Matteo Renzi has also backed away from austerity and called on Merkel and other European leaders to make growth a priority.

France, like many other countries, was compelled to adopt some austerity measures at the height of the euro crisis, when financial markets punished countries with high debts and deficits through higher interest rates. Today, those rates have fallen sharply, but a growth rebound has still been slow in coming.

Montebourg, a charismatic figure from the left wing of the Socialist Party, has long been a thorn in the government’s side, delighting his substantial anti-globalization constituency with strong criticism of foreign investors but muddying Hollande’s message that France is open to international business.

Pascal Perrineau, a professor at the Institut d’Etudes Politiques in Paris, said that the government resignation was a potent sign of open rebellion within the Socialist Party and of the struggle the government faced to maintain its parliamentary majority when elections are held in 2017. But he said it also showed that Hollande was unwilling to cave into demands from the hard left of his party to stop tough but necessary economic changes.

“Mr. Hollande is sending a message at the national and international level that France will not change its economic direction at a time of great political and economic weakness in France,” Perrineau said.

Reporting was contributed by David Jolly and Maïa de la Baume in Paris, and Alison Smale in Berlin.