07/06/2012 04:12 pm ET Updated Sep 05, 2012

Mr. Hollande, Which Mitterand Will You Be?

On December 1, 1983 I was invited to attend Baron Guy de Rothschild's lecture at Columbia Business School reprising why he left France in 1981 and decided to set up a new Rothschild Bank in New York. Impeccably elegant, surrounded by his wife and an entourage, he reiterated his famous statement: "A Jew under Petain, a pariah under Mitterrand" coined when France's then Socialist president had dared to nationalize the venerable Banque Rothschild.

Barely a year later in 1984 Francois Mitterrand totally reversed course and began to institute his unique brand of socialist capitalism or capitalist socialisme.

During the presidential campaign Francois Hollande consistently evoked the name and legacy of Francois Mitterrand who governed France from 1981 till 1995. Following the Socialist victory (although less than a two thirds majority) in the National Assembly on June 17, he had a very auspicious start on foreign policy, taking a stand in alliance with Italy and beleaguered Spain, against German Chancellor Angela Merkel's draconian calls for continued austerity. Hollande garnered credit for helping to push forward the agenda toward a potential banking union and greater shared responsibility among Euro members.

But now reality sets in and Francois Hollande's domestic agenda, modeled on Mitterrand 1981 is under serious scrutiny.

Similar to Mitterrand, true to his base, Hollande promised increases in public sector jobs, expenditures, and benefits, lowering the age of retirement and sharp tax increases on corporations, banks and high end incomes (up to 75% marginal rates on income above 1 million euros a year). The policies also include fostering SMEs, increase in R&D and lower tax rates for smaller enterprises.

Before presenting his budget, Hollande wisely ordered a report on the state of French finances by the independent Cour des Comptes, but the results present a serious challenge to his agenda. The report makes clear that France already ranks among the highest tax rates, but more importantly, at 56 percent of GDP, one of the highest public spending rates. It calls for curbs on public expenditures, tax reforms rather than increases and stringent discipline to cut the budget deficit.

Yet in the last week Hollande has ramped up his rhetoric persisting that the rich, corporations, banks should foot the bill for deficit reduction.

As history proved this may be a slippery road to take.

Francois Mitterrand came to power on May 10, 1981 as the first president from the Socialist party since Prime Minister Leon Blum's ill fated tenure in 1936.

Tired of a decade of post-Gaullist weak and corruption laden administrations, in the throes of a recession with 13% inflation, the French electorate was ready for radical change and welcomed Mitterrand with a deluge of red roses. In his first year Mitterrand increased the public sector, implemented a fifth week of paid vacation, put the retirement age at 60, imposed tax increases on banks and industry, nationalized 39 large and medium size banks including Paribas and Banque Rothschild (the largest French banks, Society Generale and Credit Lyonnais had been nationalized since 1946) and fully took over all major industrial firms including Thomson and even France's oldest company Saint Gobain.

By 1983 the results already proved disastrous as France lost its competitive edge in banking, commerce, media, growth stagnated, foreign investment slumped, and the franc weakened compounded by brain drain and capital flight.

Mitterrand responded forcefully and brilliantly by making a complete U-turn!

Within one year nationalization morphed into "denationlization" i.e. reprivitaization (although the state held the majority shareholding, but there was a resurgence of private investment and confidence in the strong franc policy). Following a visit in fall 1984 to the Reagan White House, Mitterrand gave an interview to the French business publication Expansion: "the American people are a formidable repository of energy and initiative. Their ability to couple industry and universities is a masterpiece of intelligence and practical sense... The lesson I took back is that we must now organize our continent. I admire the virtues of this nation, I want to know them and become closer to them." Strong praise indeed from a Socialist leader in the 1980s!

True to his word, in the next decade Mitterrand would oscillate from center left to to center right, from capitalist socialism to socialist capitalism, (including two center-right imposed co-habitation governments led by Jacques Chirac in 1987 and Edouard Balladur in 1993).

He won re-election in 1988, justifying these reversals in the name of French prestige and French "Colbertian" tradition which promoted industrial and banking expansion abroad, massive surges in export driven trade, the strong franc ("franc fort") pushing as he stated "socialisme at the limits of liberalism." He established a solid relationship with Reagan, Bush I and Thatcher in the full glory years of "cowboy capitalism." He also created a unique partnership with Chancellor Helmut Kohl, balancing the German dream of a united Europe and the Gaullist legacy of French sovereignty.

After total regulation, he espoused greater deregulation after 1987, allowing French style privatization: state influenced industrial policy in the name of competitiveness and economic nationalism.

In 1993 as France announced a second wave of privatizations including BNP Renault and Air France, John Fund in the Wall Street Journal wrote "A French Lesson for Clinton" attacking Clinton's initial tax increases and calling on the new president to emulate Mitterrand's pragmatic recognition of "the world wide tide toward lower tax rates and economic freedom."

In 2012 these views may all seem discredited and reduced to historical irony, but although Hollande's challenges are different, the larger issues are still very relevant.

Implementing a popular but unrealistic set of social measures in a recessionary environment with high unemployment, risking capital flight and lack of investor confidence, moving toward a more contentious relationship with Germany in the middle of the EU debt crisis may appear as short term solutions, but they carry long term risks.

To his credit Hollande has chosen seasoned politicians from the left and center of the Socialist Party out of the old Mitterrand team; Lauent Fabius, Mitterrand's PM in 1983, Michel Sapin and Pierre Moscovici who served in more hard left positions under Beregovoy and Jospin in the 1990s.

He has shown a more pragmatic stance in EU negotiations, yet never having been in a ministerial position, can he master Mitterrand's skills to parry and counter-parry the demands of his base, an EU in crisis and a skeptical and nervous French electorate?

Mitterrand in the mid 1980s proved his elasticity as a politician. Was he a hypocrite, a false Socialist or did he understand the deeper currents of history as he decried capitalism but never underestimated its power; as he defended France's role in all international negotiations from the unification of Germany, Maastricht and Gatt, yet never lost sight that France and Germany had to work together toward a European resolution.

Can Hollande emulate this model? Therefore President Hollande, when you evoke Mitterrand, which Mitterrand?