Ex-banker replaces rebel minister in French cabinet shake-up

By Mark John and Julien Ponthus

PARIS (Reuters) - President Francois Hollande replaced his maverick leftist economy minister with a former Rothschild partner on Tuesday in a reshuffle intended to reconcile his efforts to revive the stagnant French economy with deficit-cutting orthodoxy.

The shake-up is the latest episode in the wrangling across Europe about how much budgetary rigor the region's economies can bear as they recover from financial crises. For Hollande, who is revamping his government for a second time in two years, it could be his last chance to make a success of his presidency.

Arnaud Montebourg, ejected from the key economy ministry post on Monday after his latest tirade against German-enforced "austerity" in the euro zone, was replaced by Emmanuel Macron.

Macron, a 36-year-old former merchant banker, acted as Hollande's top economic adviser until June and was widely known in French business circles as their "ear" at Hollande's presidential palace, otherwise largely packed with technocrats.

The new cabinet makes its debut just a few weeks ahead of tough negotiations at home and with EU peers on a 2015 budget widely expected to break promises to Brussels over deficit cuts.

Sources close to Hollande said the new cabinet, whose names were read out on the steps of his Elysee Palace, would carry out his plan of reconciling pro-business measures to boost growth - including 40 billion euros in corporate tax cuts - with promises to adhere to EU budget rules.

"We need it to act in such a way as to ensure solidarity, respect and consistency," one source said of Hollande's bid to draw a line under two years of confused leadership that has seen his popularity ratings spiral to record lows.

Hollande's former coalition partners, the left-wing Greens, will field no ministers in the new cabinet. Senior Green Jean-Vincent Place said "the conditions were not met" for them to have a role in government.

"OVERDUE"

Finance Minister Michel Sapin kept the role in which he has tried to reassure EU partners that France will finally mend its public finances despite repeatedly failing to bring its deficit below an EU-endorsed limit of three percent of output. Sapin was undermined by Montebourg's public questioning of the EU rules.

"After the unacceptable comments from the ejected economy minister, this step was overdue," Germany's EU Commissioner Guenther Oettinger said earlier of the French reshuffle.

"This move clearly shows that the right wing of the Socialist party is also able to speak louder," wrote ING's Julien Manceaux in a note to clients, calling the choice of Macron "a very good signal to France's European partners".

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Two other rebels, culture minister Aurelie Filippetti and education minister Benoit Hamon, were replaced by existing ministers solidly loyal to the increasingly centrist line that Hollande has set for his Socialist government since January.

Valls handed in his government's resignation on Monday after Hollande judged that the outspoken Montebourg had gone too far by attacking his economic recovery plan and crucial euro zone partner Germany's "obsession" with austerity.

While Montebourg's appeals for fiscal loosening aimed at boosting growth have started to gain traction in some quarters outside France, others insist that trimming welfare systems and state spending are needed to make economies more competitive.

At stake is the slender majority of Hollande's Socialists in the lower house of parliament which is due to examine the budget bill and other reforms, including a liberalization of France's highly regulated services sector, in the coming weeks.

If around 40 leftist Socialist deputies feel under-represented by the new cabinet, they could abstain or oppose the forthcoming reforms. The downside for them is that, given the unpopularity of the ruling majority, they would likely lose their seats if a rebellion triggered new elections.

Filippetti earlier played down speculation that the existing ministers would seek to lure away leftist deputies from the government camp and so undermine Hollande's fragile majority.

"It's not our aim to provoke a government crisis. I will support the new government," the ex-culture minister told BFM-TV, saying she planned to focus her work on the depressed region of northeastern France where she is a Socialist deputy.

The European debate about how to kickstart growth while not undermining public finances is not just felt in France.