France's beleaguered president recently announced a new 'Responsibility Pact' that has variously been described as an historic social compromise and an abrupt U-turn. So which is it?

About a month ago, François Hollande announced a ‘Responsibility Pact’ (Pacte de Responsabilité) between the French government and employers: the former would cut taxes on businesses and the latter would commit to creating jobs. Many see this move as a major policy U-turn by the Socialist government, comparable to the one that occurred in 1983, when François Mitterrand embraced austerity in order to maintain France’s position in the European Monetary System.

Unsurprisingly, the harshest critiques come from the left, and from Keynesian economists, who deplore Hollande’s supposed conversion to supply-side economics in a Europe desperately in need of a boost in demand.

Before attempting to make sense of the Pact, let us start by detailing what was announced:

•Beyond the €20 billion tax credit for businesses rolled out since the last year, a €30 billion reduction in the cost of labour will take place from 2015 onwards. This will be a permanent measure. In practice, employers will be exempted from paying contributions for family benefits (cotisations familiales).This represents an incentive to hire because cotisations familiales are linked to jobs.

•In return employers are expected to commit to increasing job creation. The deal will be ironed-out as part of a round of negotiations with social partners, which will take place over the next few months. François Hollande has talked about ‘the largest social compromise proposed to the country for decades.’ This will be concluded via a ‘vote of confidence’ in Parliament next June, a decision that says a lot about the President’s determination

•There will be no ‘tax transfer’ onto households, for example in the form of higher VAT or income tax rates. €50 billion will have to be saved over the period 2015-2017 on top of the €15 billion savings already planned for this year. Cuts will impact predominantly on social security and local authority budgets. Social security might become more conditional, especially the reimbursement of medicines and health services and, perhaps, unemployment insurance. Regarding local government, some of the 21 regions will be encouraged to merge and a clear division of labour between départements (local districts) and the newly created ‘métropoles’ (metropolitan regions) will be mandatory in order to avoid inefficiencies and two bodies covering the same space.

As Libération put it, the Pact is unambiguous ‘pro-business shock-therapy’ designed to restore investors’ confidence in the French business model. Overall, it is estimated that the tax burden on businesses should have decreased by 5 to 10% by 2017.

François Hollande justified these measures by referring to Jean-Baptiste Say’s 1803 law, according to which ‘supply creates its own demand’. Implicitly, this is recognition that the current French tax system has a negative effect on investment and production. French industrial firms have invested dramatically less in the recent past than their competitors in neighbouring countries.

There are three main types of criticism coming from the left. First, untargeted tax cuts are said to be inefficient - merely a ‘gift’ to many employers who do not need them - and job creation commitments risk being only symbolic. Second, spending cuts may depress demand further as has happened elsewhere in Europe. For example, cuts to the public procurement channel in particular could deal a significant blow to SMEs in a country where local authorities represent 75% of public investment. Finally, from a political point of view, the Pact is very reminiscent of Blair-Schroder-type liberalism and thus risks alienating further Hollande’s left-wing electorate.

Yet perhaps the ‘Responsibility Pact’ deserves a bit more consideration. Both from a political and economic point of view, it is a bold attempt to regain the upper hand, embarrass the opposition and silence all the doomsayers who lambast France: for the lack of growth and job creation, the negative publicity about tax, and poor results in international rankings such as PISA. Opinion surveys have documented in detail the extent to which collective self-confidence, and social and political trust, have been eroding.

Hollande’s ‘Responsibility Pact’ makes clear his desire for a forward-looking politics of action rather than a conservative defence of the status-quo.   Moreover, the Pact signals the acceleration of a politics of social dialogue and burden sharing which has brought about interesting and often overlooked results.

For all the scorn poured on him, François Hollande has probably been the most reformist president France has had for decades. In 18 months, he obtained the green light from employers and trade unions to extend the working life period; to give companies more of German-style internal flexibility; and to grant employees transferrable lifelong training rights. No less significant measures have been enacted in the education sector to tackle deficiencies and inequalities at primary school level. All these deals are good news in a country prone to protest and political blockades.

Hence, for the European left, the French experience should serve as both a sobering and encouraging signal. The sobering part is that, in a competitive environment where capital is mobile, individual countries ought to be extra cautious with taxation. If a race to the bottom is to be avoided, European centre-left parties should sign up much more forcefully for the common corporate tax base proposed by the European Commission, and for some form of minimum wage coordination. The fight against tax avoidance should also be high up in their priorities. More cooperative arrangements might take time to kick in, but this is a just and crucial cause for progressives.

The encouraging bit is that there is room for a state-based, left-wing reform agenda ‒ both in form and substance ‒ against a background of fiscal tightening. As Philippe Aghion recently argued at a Policy Network/IPPR event, centre-left governments have the opportunity to shift money from departmental spending to investment. The type of short-term, cost-competitiveness measures taken by François Hollande should not mean we overlook his attempt to embrace a political economy based on upgraded skills and innovation.

One can only regret that the French president has no better story-tellers. The problem of today’s centre-left leaders is that they let themselves get in a corner of ‘TINA (There is no alternative)’ discourses while there is ample room to talk about burden sharing and future-orientated social investment. Encore un effort, Monsieur le Président!

Renaud Thillaye is senior researcher at Policy Network. This post first appeared on the Policy Network website