04/11/2014 09:08 am ET Updated Jun 11, 2014

The French paradox

Every crisis is a consensus slayer and an opportunity begetter. For France, whose government has just been reshuffled after a debacle in the polls, time is ripe for a real change or the country's economy will be shipwrecked for good. But the economic options of the new prime minister are locked into a political catch-22: how to promote an approach resolutely conducive to business when labor unions, the far-right, the traditional-leftists and a torn-up majority are shouting in the name of neo-liberal treason? Meanwhile, his political equation stumbles over an economic dilemma: how to hasten the public's spending ebb and finance a tax reduction without increasing austerity? Name it the French paradox.

First of all, Mr. Valls announced that he would implement the "responsibility pact," a pro-business and supply-side policy aiming at boosting France's competitiveness by €30 bn. reduction of labor costs focused on low wages. No doubt this is a positive beginning.

However, this proposed type of "internal devaluation" works well only if it embraces higher-paid jobs spread across companies facing international competition, which are precisely the one to be targeted to improve a country's competitiveness. In order to reach full efficiency, tax cuts should be applied to a larger class of employees. Mr. Valls partially addressed this concern by an additional relief in 2015 on salaries up to 3.5 times the guaranteed minimum wage. He could go further.

Besides, such measures would remain quite rough without a comprehensive social agenda and a growth stimulus package. Other measures announced by the prime minister include a €11 bn. extra tax cuts for businesses and low-income households, and a reduction of corporate tax from 34 percent to 28 percent in 2020.... Still, they cannot be qualified as game changers since they remain widely undocumented at this point.

Mr. Valls' new policy would be partially financed by additional cuts on France's public spending amounting to €50 bn. over three years for the national government, for the healthcare system, and for local authorities, whose spending have sky-rocketed since the early 80's. Mr. Valls also stated his intention to engineer an overall reshuffle of the complex French territorial organization to be completed by 2021.

Yet, such measures would be impossible without the relaxation of the fiscal compact, postponing the 3% deficit reduction target to 2017. In the eyes of many, this is the weakest and most arguable part of the French message. On the contrary, I deem it to be the cornerstone of the plan.

The objection of a harsh reaction of markets is baseless, as the prediction that Hollande's election would lead to an increase of the cost of France's sovereign debt: the opposite actually occurred. Indeed, markets have already widely priced-in the French paradox. What matters most is to substantiate the lowering-driven trend of the deficit, already reduced from 7.9 percent in 2009 to 4.3 percent in 2013, by a complete, coherent and comprehensive recovery policy.

The case for relaxation would become more and more proven as hostility rumbles against worsened austerity policies, which are suffocating the growth, drying out tax revenues and fracturing the populations. Austerity can lead to the exact opposite of what it is supposed to achieve. Thus, any new French policy should also be lifted by audacious measures to set the engines of growth back in motion. The prime minister's speech missed that last point.

Lastly, the ECB must act after it once again failed to do so, despite the many concerns recently voiced by leaders and experts. There is no escape from a shift in monetary policy. And in the long run, only growth will be able to shatter the deflationary spiral, which is casting shadows all over Europe.

There is no French-only solution to the pressing French challenges, and the EU cannot get away from the debate on the fiscal compact advocated by France, Italy, and many others to follow. Nonetheless, French politicians can only improve the country's situation and gain traction on their European partners by dealing first with their own paradox. Mr. Valls seems to be going down that road but yet his path remains arduous.