The long-standing sibling rivalry between Britain and France was reignited last Monday at the G20 Summit in Mexico. Prime Minister David Cameron sharply criticized the newly elected Socialist Party’s François Hollande’s proposed 75% income tax rate on those making more than €1m annually.
“We will roll out the red carpet and we will welcome more French businesses which will pay their taxes in Britain,” said Cameron on Monday, adding, “That will pay for our public services and our schools.”
Downing Street quickly back-pedaled from the comments, claiming that they were made “partly in jest,” but like most comments cast light-heartedly, there is a kernel of truth behind it. The proposed 75% tax is largely symbolic, and would only affect about 3,000 citizens, making a less-than-modest dent in France’s colossal debt.
This episode is bound to be the first of many for these two administrations. Hollande has openly described himself as an “enemy of finance,” while Cameron’s Conservative Party has been far friendlier to big business, notably by lowering taxes on the highest earners this year. Hollande recently lobbied Angela Merkel to scrap the austerity plan slated to mitigate the dire straits in which the Euro zone has suddenly found itself. The newly elected Socialist President has strongly stated his support for a financial transactions tax, which many believe will further depreciate investment.
There is a critical omission in Hollande’s platform: while Hollande may declare himself an enemy of finance, France’s fate is more intricately intertwined with the health of the international economy than almost any other country. According to the International Monetary Fund, 59% of France’s government debt is held by foreign nations.
France has far less leverage than Britain does, primarily due to the fact that France is part of the single-currency of the Euro zone. While the Bank of England can buy debt essentially indefinitely from the British government, the European Central Bank is prohibited from buying debt from France. Compounding this is the deep debt plaguing many of the bloc’s countries, with Spain expected to request as much as €100 billion in the coming days. While these crises obviously send deep ripples through the international economy, Britain may operate at arms-length while France has no such luxury.
This year, the French government will have to borrow 18% of its GDP in order to maintain their current level of borrowing. For Hollande to sanction finance is to essentially bite the hand that feeds him. Given where much of France’s assets lie, it seems dangerous to punish the institutions that are keeping the country running. France should heed the chiding of its neighbor across the Channel and chart a way to reduce their debt expediently and responsibly.