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Published: Thursday April 3, 2014 MYT 3:35:23 AM
Updated: Thursday April 3, 2014 MYT 3:35:35 AM

Anti-austerity leftist promoted in French cabinet reshuffle

PARIS (Reuters) - A fierce critic of budget austerity was named French economy minister on Wednesday in a reshuffled government packed with strident personalities, including President Francois Hollande's former live-in partner Segolene Royal.

Hollande has charged the new cabinet with halting France's economic decline after 22 months in power during which his poll ratings have collapsed to record lows, leading to the trouncing of his Socialists in weekend local elections.

While his first government was accused of blandness, this cabinet includes a powerful role for leftist Arnaud Montebourg, known for attacks on big business and the European Commission, who rises from industry minister to take charge of an enlarged economy ministry.

The scope for in-fighting also remains high: Prime Minister Manuel Valls has long enraged the French left with his socially conservative positions, while Royal brazenly defied Socialist party grandees to run her ultimately failed 2007 presidential bid.

Montebourg, who has accused the EU executive of strangling economic recovery with austerity policies, won promotion just two days after Hollande hinted that Paris would seek yet more time from Brussels to get its public finances in shape.

Royal, who announced her split from Hollande just after the 2007 election, returns to front-line politics as energy and environment minister. But the conservative opposition took aim at Montebourg, who in 2011 called the policies of German Chancellor Angela Merkel "dangerous and suicidal".

"I see that Mr Montebourg has been promoted in charge of economic policy," Jean-Francois Cope, leader of the UMP party said after the names of the new government were read out on the steps of Hollande's Elysee Palace.

"It is he that will go to Europe to discuss our economic policy, notably with the Germans whom he has copiously insulted over the last two years," said Cope.

The European Commission has already given France an extra two years until 2015 to get its budget deficit within a target of 3 percent of economic output - a goal that looked far off with data this week showing it stood at 4.3 percent in 2013.

In the first big policy challenge for the government, France has to detail its long-term public finance plans to Brussels later this month and any deviation from the 3-percent target will likely go down badly.

Valls, who was named as prime minister on Monday, said that there were limits to how far reining in the public finances could go.

"We obviously have to reduce our public deficit," Valls said on TF1 television. "But we have to do it intelligently without putting the fundamental public services at risk."

Hollande said on Monday that France's efforts to stimulate growth, notably through tax cuts for low-earners, would have to be taken into account by Brussels. Jeroen Dijsselbloem, chairman of the euro zone's finance ministers, hit back by insisting that France knew it must deliver on its promises.

BALANCING ACT

At the start of the year Hollande espoused more centrist policies, including a plan for 30 billion euros ($41 billion) of cuts to employment charges in a "responsibility pact" aimed at encouraging business to hire more workers.

The naming of Valls, a centrist often likened to former British premier Tony Blair, reflected that policy switch. But Hollande has also stated that the local election losses showed the Socialists needed to look after working-class voters better.

"This is less of a move towards the centre than the naming of Valls makes it look at first glance," said Philippe Brossard, chief economist of insurer AG2R.

Montebourg will work alongside Michel Sapin, a long-time Hollande loyalist who was promoted from labour minister to replace Pierre Moscovici as finance minister - a job he held over 20 years ago under ex-President Francois Mitterrand.

While Sapin will have formal oversight over public finances, Montebourg's expanded role, covering industry and the digital economy, will give him a bigger say on policy than before.

"Sapin is a reformer but he'll be next to Montebourg, who is less pro-European and more interventionist," said Deutsche Bank economist Gilles Moec, noting "deep ambiguities" in the make-up of the new cabinet.

With the EU studying telecom sector reform, Montebourg will push his view that European operators be allowed to consolidate so as to compete with global giants such as Google and Facebook - a position not always shared by Brussels' anti-trust office.

Even with the imminent nomination of junior ministers, the new government team will be smaller than the 38-strong original line-up that was accused of amateurishness and internal splits.

Hollande's Greens coalition partners refused to take part in the Valls cabinet in protest at the new premier's conservative stances on issues such as immigration, a move which could weaken support for the government's economic reforms in parliament.

Yet the promotion of Montebourg and the naming as education minister of prominent left-winger Benoit Hamon was an attempt by Hollande to please everyone in his Socialist Party, which still has a slender majority in parliament.

Royal's "green" credentials - she has called for France to wind down its reliance on nuclear power and invest in renewable energy - could help to persuade Green deputies to maintain their backing for the government.

The first test will be the formal parliamentary vote on the new government set for next Tuesday, with a separate vote due on the responsibility pact and planned public spending savings to be held around the middle of the month. ($1 = 0.7249 Euros)

(Additional reporting by Nicholas Vinocur, Leila Abboud, Brian Love and Leigh Thomas; Editing by David Stamp and Sonya Hepinstall)

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