Global Market Insights | A Fisher Investments Blog

Soaking the Footballers

During France ’s presidential campaign, François Hollande made a much-discussed pledge to tax all incomes exceeding €1 million at 75%. Now as the victorious Monsieur Hollande prepares to move into the Elysée Palace next week, many are wondering how France ’s high earners will react if his proposal takes effect (which isn’t guaranteed to happen, as discussed here). According to the Financial Times, more and more French high earners are looking into leaving the country. (That’s to be expected—generally, the more you tax something, the less you get; so more taxes on high incomes means fewer high incomes to tax.)

That’s an easy enough move for business people, financial services professionals, entrepreneurs and the like. But what about France ’s footballers? Many are locked into long-term contracts they signed assuming a 41% top tax rate, and the new 75% rate would amount to a hefty pay cut. International players are particularly loathe to accept this—they’re not French citizens, and many feel the onus shouldn’t be on them to help the government shore up its finances. And it’s pretty much given the tax would create disincentives for foreign stars to join French clubs in the future—they can likely net a higher income in the English Premier League, Spain, Italy or Germany, unless French clubs offered a substantially higher pre-tax salary (which they likely can’t afford). In short, it’s tough to imagine France ’s Ligue 1 remaining in Europe ’s top tier for long if the tax takes effect.

To help ease the potential burden on France ’s football stars (and, presumably, prevent a talent flight), Hollande suggested including a “smoothing mechanism” for footballers, which would presumably escalate their tax rates incrementally (he hasn’t elaborated on the details). That would likely help footballers, but only to an extent—it would buy them time to finish out their contracts and sign on elsewhere. It wouldn’t make France any more attractive to international stars, and it wouldn’t prevent the best French players from leaving in search of higher pay. And that could make for some very frustrating UEFA Champions League seasons for French football fans.

Then again, Hollande’s a pragmatist—or at least, he seems one, based on his softened rhetoric since the election. Will he really accept being the man who killed French football?

Previewing the Greek Election

France’s upcoming second-round vote has dominated headlines lately, but it’s not the only election happening Sunday. Greek voters also hit the polls to select the replacement for interim Prime Minister Lucas Papademos’s technocratic government.

The contest is wide open. There are 32 parties on the ballot, and the latest polls suggest 10 have enough support (3% or more of the popular vote) to win seats. The two main parties, center-left PASOK and center-right New Democracy, are polling at roughly 15% and 20%, making a hung parliament possible. Mirroring the trend seen in France’s first-round vote, far-left and far-right parties have gained considerable support, as Greek voters become increasingly austerity-fatigued. To meet the EU and IMF’s conditions for receiving bailout funds, Greece has passed wide-ranging public-sector job, wage and pension cuts. While these were necessary for Greece to start regaining its fiscal footing, they’ve severely impacted many Greek lives. And a growing number of Greek voters thus see the mainstream parties as simply following edicts from EU and IMF officials without a second thought for their people’s quality of life—and to them, the far right and far left are the political saviors who’ll look out for Greece’s best interests. Their pledges to resist Brussels’ mandates, rather than their misguided communist and neo-fascist policies, are what most new supporters find attractive.

Assuming various parties are able to form a coalition (it’s possible they go the way of Belgium and fail to reach a power sharing deal), the result may be a patchwork quilt of sorts. PASOK and New Democracy could form a combined majority on their own. Failing that, they could join with some of the smaller parties in a unity government. Or either party could find enough partners to form a government without the opposition’s help. It’s also possible one party could win the majority—polls suggest it’s unlikely, but the most recent was taken nearly two weeks ago. Opinions and preferences can change even in such a short period.

So what does this mean for Greece’s continuing quest to secure bailout funding?

In order to receive future aid installments, the Greek government needs to demonstrate ongoing deficit reduction progress and continue implementing the austerity measures outlined in the packages. This will likely involve passing some unpopular, politically unpalatable legislation—the first of which, €11.5 billion in fresh budget cuts and 150,000 additional public-sector job cuts, is due in June.

Antonis Samaris and Evangelos Venizelos, the leaders of New Democracy and PASOK, provided the European Commission and IMF with written, signed pledges to adhere to the bailout’s austerity terms. Their parties should stand behind them, considering the rebel MPs who voted against the most recent austerity package in February were promptly expelled from the parties—those who remain understand what’s needed.

If PASOK and New Democracy don’t have a combined majority, it’s entirely possible they could round up enough votes among the fringe parties (much like the UK’s last Labour government occasionally relied on the Democratic Unionist Party when bills lacked adequate back-bench support). As tough as some candidates’ anti-austerity rhetoric has been, if they’re faced with the choice of getting much-needed bailout money or not—and the risk of being labeled responsible for a potential Greek bankruptcy—it’s hard to imagine no one making the necessary concessions.

And if Greek MPs can’t form a government before it’s time to present the June spending cuts to the European Commission and IMF? President Karolos Papoulias can designate a caretaker government to pass budgetary measures until a new election is held—just as he appointed Lucas Papademos to head the current caretaker government after former Prime Minister George Papandreou stepped down last autumn.

In short, while the election could go any number of ways, it’s still possible even the most fractured of parliaments can pass the spending cuts Greece needs to secure more external funding and keep meeting its obligations. The debate surrounding these measures will no doubt be heated, and ideology could yet trump pragmatism, so nothing’s guaranteed—but there’s no reason the grimmest predicted outcomes must automatically come to pass.