* Hollandenomics Two years after the presidential election, Francois Hollande announced
a radical policy shift in January 2014, opening a new chapter in French economic policy.
* Supply-side approach The new policy is based on a simple equation: €30bn of
corporate tax cuts (page 6) financed by €50bn of public spending cuts (page 9), against a
background of structural reforms (page 12). Reforms that have been voted already will
increase market flexibility (page 36) and reduce pension costs (page 43).
* Four reasons why implementation should be smooth
1 - Clear strategy: aimed at reducing unemployment while boosting competitiveness and
growth potential over time, a tried-and-tested recipe for rebalancing government spending;
2 - Much better casting: The new prime minister, Manuel Valls, is a true leader and all seven
ministers (the team has been reduced) have experience of being in power;
3 - Improved governance: The Greens have left the government, allowing for a clearer (and
less costly) energy policy, with a focus on one of France’s key strengths: nuclear power;
4 - Low execution risk: The Socialist party has a full majority in Parliament and knows there
is no viable policy alternative given France’s high debt. The new policy has the backing of the
French employers’ association (Medef) and the approach of the trade unions is constructive.
* Favourable context for CAC40 and OAT/Bund spread A delay in European budget targets
in exchange for structural reforms will allow better growth. In this context, we continue to believe
that the spreads between French OATs and German Bunds could remain narrow. We
expect French equity performance to accelerate, with the CAC40 reaching 7000 by end-2016
or sooner and significantly outperforming the German DAX index, which is burdened by the
costly game changers stemming from the new Grand Coalition (page 18).