Just one year since his triumph in the 2012 election, French President Francois Hollande is struggling to reverse the collapse of popular support. His abandonment of key planks of the Socialist platform has contributed to a sense of betrayal among his left-leaning base, while the government’s lack of action on key structural reforms has fostered a sense of buyer’s remorse among centrist voters who took a chance on the Parti Socialiste candidate.

These factors, along with other politically divisive controversies, such as the recent legalization of same-sex marriage, have pushed Hollande’s approval rating down to 24 percent, the lowest for any president in the post-WWII period.

Amid mounting evidence that the EU’s policy of strict fiscal austerity has worsened the regional downturn and created an impediment to reducing unemployment, members of the bloc have been granted more time to get their fiscal houses in order, a policy shift that could help to ease the social and political tensions that have contributed to a marked increase in anti-EU sentiment in France.

The deadline for cutting the general government deficit to no more than 3 percent of GDP has been pushed back by one year to 2015. But the extra time may not matter unless the government gets cracking on reforms that are widely viewed as essential to positioning France to compete effectively once a recovery takes hold.

In addition to labor-market reforms, the European Commission has called for simplification of the tax system and a general program of deregulation. Improving the efficiency of public spending, notably in the areas of pensions and prescription drugs, is also on the government’s to-do list.

In terms of the political risks, the most difficult issue is labor-market reform.

In terms of the political risks, the most difficult issue is labor-market reform, which, if tackled with any energy, will trigger an explosion of trade-union activism that more than likely will only deepen public dissatisfaction with Hollande’s performance. The contentious debate over immigration highlights yet another source of potential conflict, especially over the summer months, when disaffected youths often take to the streets. Consequently, firms should be prepared for disruptions to normal operations.

The economy is forecast to contract slightly in 2013, but the easing of austerity, combined with a gradual improvement in export demand, will create a basis for a recovery in 2014. A focus on productivity gains will limit the positive contribution from capital spending and household demand in the near term, and the pace of expansion will be held to less than 1 percent next year.

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