Politics are heating up in France and Germany as French president Nicolas Sarkozy clings to his political life and German chancellor Angela Merkel is under increasing pressure over more bailouts.

The Financial Times reports Merkel to join Sarkozy on campaign trail

German chancellor Angela Merkel promised to join Nicolas Sarkozy on the campaign trail as the French president took to the airwaves on Sunday to launch a set of German-style structural reforms aimed at seizing the initiative in his uphill re-election attempt.

Ms Merkel’s Christian Democrat party said she would “actively support Nicolas Sarkozy with joint appearances in the election campaign in the spring”. The announcement caused surprise in Paris as Mr Sarkozy, also of the centre-right, has yet officially to declare his candidacy for the election, which will take place over two rounds on April 22 and May 6.

The pledge by the German leader underscored the close ties she and Mr Sarkozy – together now habitually dubbed “Merkozy” – have built during the eurozone crisis, despite clear tensions between them at times. Ms Merkel pointedly avoided overt backing for David Cameron, the British Conservative party leader, in the 2010 UK general election.

Her intervention represented a clear rebuke to Mr Hollande. He has promised to renegotiate the new “fiscal compact” for the eurozone forged by Ms Merkel and Mr Sarkozy, due to be signed at a European Union summit in Brussels on Monday. He criticised it in his manifesto for lacking any growth stimulus and called for eurobonds and a revised pro-growth role for the European Central Bank, both strongly opposed by Berlin.

Sarkozy Proposes German-Style Reforms

Hoping to give a lift to his faltering campaign, Sarkozy to bring in German-style reforms

French president Nicolas Sarkozy unveiled German-style labour market reforms on Sunday as part of a package of measures aimed at reinvigorating the economy and his re-election prospects, hours after German chancellor Angela Merkel promised to join him on the campaign trail in an unusual show of cross-border support.

He announced a €13bn cut in France’s labour costs, which are among the highest in Europe, by reducing social charges on employers. The cut would be funded by an increase from October – well after the election – in value added tax to 21.2 per cent from the current level of 19.6 per cent, plus an extra tax on financial income.

Citing reforms made under former German chancellor Gerhard Schröder, who recently visited Mr Sarkozy, the president also proposed allowing companies more freedom to negotiate flexible working hours and pay levels with local unions – further eroding the significance of France’s statutory 35-hour working week. Similar moves in Germany had “created job, jobs and more jobs”, Mr Sarkozy said.

He announced the introduction of a long-promised financial transaction tax from August, saying the 0.1 per cent levy would include credit default swaps and “speculative computer trades”. France is determined to pioneer a full-blown FTT in the eurozone. “What we want to do is provoke a shock, to show an example,” he said.

Mr Sarkozy’s determination to push ahead with the shift of some welfare funding to VAT – known in France as “social VAT” – just months before the election was described by one parliamentary deputy from his UMP party as “political suicide”.

It has been flatly rejected by Mr Hollande and the president himself specifically ruled out an increase in the general VAT rate as recently as last October.

Will Sarkozy Please Make Up His Mind?

With today’s announcement it appears the financial transaction tax is once again on the table. Sarkozy announced it, even to the point of “France Going Alone” if the EU would not approve. Then Sarkozy Dumps Financial Transaction Tax After Pressure From Banks. Now the proposal albeit in a modified form is back on the table.

In my opinion a financial transaction tax is economic insanity. It will reduce liquidity and perhaps cause a market crash.

Indeed all these taxes are economic insanity. Europe is headed into a huge recession. Increasing the VAT is the last thing one should want to do.

Hollande Vows to Raise Taxes for Rich and Banks

Meanwhile socialist challenger François Hollande sings a populous tune and vows to raise taxes for rich and banks.

François Hollande has outlined plans to raise taxes from the country’s banks, big companies and higher earners to close the country’s budget deficit and fund job creation in his bid to defeat Nicolas Sarkozy in France’s presidential election.

In a 60-point manifesto, the opposition Socialist party candidate also pledged to reopen the issue of pension reform, challenging one of the key achievements of Mr Sarkozy’s term of office.

The manifesto included a call to renegotiate the new eurozone “fiscal compact”, saying its emphasis on austerity aggravated the economic situation. He said the pact and the role of the European Central Bank should be re-shaped to favour growth, and he called for the creation of eurobonds to overcome the sovereign debt crisis.

Mr Hollande proposed finding all of the €29bn additional savings he said had to be made by 2013 through taxes. These would be raised by increasing levies on higher earning individuals, upping taxes on banks and removing a series of tax breaks for big corporations.

“If there are sacrifices to be made, and there will be, then it will be for the wealthiest to make them,” Mr Hollande said.

He insisted, however, that although the overall burden of taxes on the French economy would grow to almost 47 per cent of GDP by 2017 from 45 per cent this year, this was exactly in line with the current government’s own proposals.

Mr Hollande’s manifesto included €20bn of new spending measures, mostly to fund the hiring of 60,000 teachers, tens of thousands of new jobs for young people and support for small and medium-sized businesses.

A poll published yesterday by CSA put Mr Hollande on 31 per cent in the first round of voting, ahead of Mr Sarkozy on 25 per cent, with the socialist taking 60 per cent in a second round runoff against the incumbent.

Presidential Pay Hikes May Sink Sarkozy

Bear in mind that one of the first things Sarkozy did after the 2007 elections was to raise his salary from 100,000 euros to 240,000, a 140% increase. Much voter resentment lingers over that pay raise.

In contrast The Telegraph reports French front-runner pledges to cut his pay by 30 per cent as he aims to become next president

Francois Hollande, the front-runner to become France’s next president pledged to cut his and his government’s pay by 30 per cent on Sunday, as he hit out at the rich while seeking to dispel niggling doubts he has what it takes to become his country’s next leader.

With just three months to go before elections, poll after poll suggests Socialist Mr Hollande will secure a comfortable victory over the unpopular Nicolas Sarkozy, his conservative rival and the incumbent.

Hollande’s economic plan does not have to make any sense, and it does not have to be any better than Sarkozy’s. Rather, Hollande’s plan merely has to resonate with voters. A 20-point lead in second-round polls shows he has done just that.

I do not believe Merkel can save Sarkozy. Moreover and if she doesn’t, her political stunt will hurt her own chances down the road.

Mike “Mish” Shedlock
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