French presidents often oversee several governments during their five-year terms, but the latest Cabinet overhaul happens at a time when France is dealing with a stagnating economy and faces growing social discontent. More important, Hollande will now face intensified pressure to confront Germany’s leadership of the European Union: Several factions within the ruling Socialist Party are demanding a break from the fiscal consolidation policies imposed by the European Union and supported by Berlin.
Hollande's decision came a day after Arnaud Montebourg, the French economy minister, harshly criticized those very policies. According to the minister, France should rebel against Germany and change its focus from reducing public spending to supporting households to revive consumption. While the Elysee did not draw a direct connection between these statements and Hollande's decision to dissolve the French government, the president confirmed that Valls will stay on as prime minister, and Montebourg said he will not participate in the new government. As a result, a significant change of policy is not to be expected in the short term.
Montebourg's statements highlight the extent to which the economic crisis is generating friction within the French government. When Hollande became president, his early policies were based on tax hikes and marginal spending cuts. This irritated several sectors of French society, because rising taxes amid declining economic activity negatively impacted most households. The French economy failed to return to growth, and Hollande changed direction in early 2014, announcing a series of spending cuts and tax breaks for companies hiring new workers. This in turn irritated the left wing of the Socialist Party, which demanded greater spending from the government and a renegotiation of EU inflation and deficit targets. Some party lawmakers even rebelled against Hollande, voting against some of his proposals.
Since then, decision-making in France has become particularly complicated. While the French government has managed to get legislation approved in parliament, the growing number of Socialist lawmakers who oppose Valls' government has put its majority under constant threat.
With little to no economic growth expected this year, the political crisis in France is far from over. Hollande enjoyed a relatively calm summer, with the parliament in recess and popular opinion focused on the events in Ukraine. But the summer recess is over — the French government will soon face a new set of decisions and the French parliament will have to vote on new laws. The key period to watch is late September, when the National Assembly will debate the 2015 budget. This will be a substantial challenge for Hollande, because the president will have to find a balance between the demands of the conservative and progressive sectors of his party. The budget could also create friction between France and the European Union, as Brussels will push Paris to reduce the country's deficit.
The budget will show the extent of Hollande's influence over parliament. If Hollande fails to pass the 2015 budget, it is possible that early legislative elections will occur. France's semi-presidential system means that Hollande can dissolve parliament and call for legislative elections without resigning from the presidency. But with the Socialist Party facing very low levels of popular support, new elections would probably lead to a parliament controlled by the center-right and the far right, which would severely limit Hollande's influence in legislation. Fear of losing control over the National Assembly will probably force the different factions within the Socialist government to seek compromise. While this would buy the Socialists some time, it will make decision-making even more cumbersome and inefficient.
France's political crisis will also generate concerns in Germany. Berlin wants to continue its push for countries in the eurozone to apply structural reforms, but it needs to preserve its alliance with France — an alliance that is key for the stability of the European Union. In the past few months, Berlin has combined criticism of the French government with tolerance for the Elysee's repeated failure to meet its deficit targets. However, growing political and social unrest in France will make it increasingly difficult for Berlin and Paris to find accommodation, especially as a larger part of the French establishment will push for a more direct challenge to Germany's EU leadership.
At this point, the crisis in France is mostly political, with frictions within the French government complicating decision-making and forcing Hollande to order government reshuffles. Hollande's survival as French president is not yet in doubt, and neither is France's political and economic direction. The real game changer in France would be a significant increase in social unrest. France already saw several protests and strikes this past winter, and Stratfor expects social unrest to return to France late this year and in early 2015. The length and depth of this new wave of unrest will be more crucial to France's political future than any imminent government reshuffle.
