Francois Hollande vows 'supply-side' assault on French state, doubles down on EMU austerity agenda The French leader - who deflected questions about his alleged affair with actress Julie Gayet - admitted that he had misjudged the gravity of the crisis, pledging an "economic battle" to preserve French credibility and power. Yet he is sticking to demands from Berlin and Brussels for further austerity to meet EU deficit targets, despite the risk of a triple-dip recession. Spending cuts will come first, followed by tax cuts later. The policy is not neutral. Fiscal cuts equal to 1.8pc of GDP last year were the key reason why the French economy relapsed, driving unemployment to a 16-year high of 10.9pc and inflicting grave damage on Mr Hollande's governing credibility. A leaked report based on surveys by "prefects" in each of the 101 departments said the situation was becoming dangerous, describing a "society that is angry, exasperated and on edge. A mix of latent discontent and resignation is being expressed through sudden eruptions of fury, almost spontaneously. While the fiscal headwinds are lower this year, they may still be enough to stop the economy reaching "escape velocity." Since supply-side reforms tend to hurt growth at first, the strategy risks pushing France closer towards a deflation trap. Unlike Britain and the US, France is having to endure austerity without aggressive monetary stimulus to cushion the blow. French economists are deeply split over the reforms. Marc Touati, from the economic consultants ACDEFI in Paris, said the measures are too vague to pull the country out of its downward slide. It's a bluff intended to buy time and soften up the rating agencies. It won't be followed by concrete action," he said. Standard & Poor's downgraded France to AA in November, with Moody's expected to issue its verdict later this month. S&P said France is stuck in a low-growth trap with unemployment likely to stay above 10pc until 2016. It blames the malaise on the sclerotic state sector, now at Swedish levels above 56pc of GDP but without Sweden's labour flexibility and free markets. Alain Bokobza, from Société Générale, said the reforms amount to a "radical policy shift" comparable with the ideological U-turn in 1983 by President François Mitterrand, when he made his peace with French employers and ditched his hard-Left policy of "socialism in one country." Mr Hollande was intimately involved in the episode as a member of President Mitterrand's political staff, and watched his mentor come back from near political death with a Rightward shift. Société Générale said French equities outperformed German equities by 100pc over four years from 1983 to 1987. There could be another catch-up rally this time as Germany goes in the opposite direction, with a new minimum wage and an erosion of its reforms. "Buy the CAC 40," said Mr Bokobza, predicting a 60pc jump in the French index to 7,000 by the end of 2016. He said France will enjoy a growing advantage over Germany in power costs for industry. France pays less than €0.10 per kilowatt hour due to relatively cheap nuclear power: Germany pays nearer €0.15, expected to rise as its nuclear reactors are phased out by 2022. It is a highly optimistic view. Huw Pill, from Goldman Sachs, said the French people must brace for a 40pc cut in relative living standards compared with Germany over coming years to bring the eurozone's two biggest economies back into alignment - a daunting prospect. Patrick Artus, from the French brokers Natixis, says the French economy is in deeper trouble than Mr Hollande and his advisers dare to recognise. The fiscal shock will not be enough to stop the chronic "deindustrialisation" of France. Mr Artus said it will take a 14pc cut in French wages to restore competitiveness within EMU. Mr Hollande's broad-brush promises leave it unclear how far he is willing to go, although the collapse in his poll ratings to near 20pc appears to have shaken him out of complacency. The French political establishment is deeply alarmed by a shift in car and truck production from French plants to sites in Spain, now deemed more competititive after wage cuts. The French leader likes to caste himself in the mould of Gerhard Schröder, even going to the party conference of the German Social Democrats last year to sing Paeans to the Hartz IV reforms that supposedly transformed Germany from "sick man of Europe" to Teutonic tiger. Christian Schulz, from Berenberg Bank, said the Schröder reforms were pushed through in one blast with cross-party support, while Mr Hollande has been feeding out measures one at a time to avoid street protests. "It is completely different," he said. Professor Paul de Grauwe, from the London School of Economics, said the Schröder era has taken on a mythical importance. In reality the Hartz IV measures did little for German productivity and investment. Germany regained competitiveness by compressing wages at time when southern Europe was overheating, he says. A global boom further cushioned the shock for Germany in the crucial years from 2004 to 2006. France faces a tougher task today's deflationary world, more akin to wage cuts under the Gold Standard in the 1930. Mr Hollande has clearly abandoned any idea of a Latin bloc of EMU states to push for growth, a stratagy that he tried tentatively at the start of his term. In a bid to rebuild tattered relations with Germany he said that all major projects in the eurozone should now be co-ordinated by Paris and Berlin through "economic convergence." In a crucial move, he revived the dying Franco-German military brigade and promised fresh life for Franco-German defence. Mr Hollande has thrown in his lot with Berlin irreversibly.