A Glance on France’s Economic Problem
Written by Hilary Barnes
The government of France’s socialist president, Francois Hollande, is being ripped to shreds for its handling of the economic crisis by critics internal as well as external.
This week the former German chancellor, Gerhard Schröder, threw in his euro’s worth, saying that while Spain and Italy were Europe’s biggest problem at the moment, France could soon become a problem, and not a minor one.
But France’s problem is that its economic problem is not made in France. It is made in Brussels, and until Brussels changes its policy France has little chance of digging itself out of the hole in which it finds itself.
The problem with the policy being imposed by Brussels is that appears to be faith-based and is conducted, very much like the old practice of blood-letting, without attention being paid to the empirical observation that it is killing the patients.
The experimental work is most advanced in the Greek laboratory, where the application of policies of « contractive expansion » have been 50 per cent successful, which is to say the contraction was so successful that expansion was stifled at birth.
Output has fallen and unemployment (25%) risen so fast that all the increases in the rates of tax have failed to raise enough revenue to finance the country’s debt, which has become bigger and bigger.
Brussels (the Trokia) has come to the rescue and is prepared to lend Greece more money on condition that Greece imposes further contraction on its people, which generosity on the part of Brussels has already increased the debt to levels that Greece will never be able to repay.
The theatre of the absurd never got as absurd as this.
The Troika’s policy does have the advantage that as long as Greece does not default (for the second time) the French and German banks can pretend that their holdings of Greek sovereign debt do not need to be written off. Maintaining the fiction that these banks are really solvent can be extended for a few more months or years.
As readers may have noticed, Portugal and Spain are being set up for the Greek treatment, and for the same reason, with the same effects, and with the same end-game in sight, when a hell of a lot of debt will have to be written off.
The Troika treatment is supposed to bring about an internal devaluation that will stimulate exports and lead these countries back to economic health. Nothing of the sort has happened. Each time the IMF looks at the forecasts it made six months earlier it finds that they were hopelessly over-optimistic.
Some at the IMF have begun to suspect that the policy is mistaken, but that fails to move Brussels, where the policies are a consequence of the Maastricht Treaty, and many subsequent reinforcements of the Maastricht principles, which were evidently discovered on tablets retrieved from a burning bush and are therefore incontravertible.
France, too, has a problem of competitivity, which to be treated effectively requires a reduction in wage levels. This can be relatively painlessly achieved by a devaluation of the exchange rate, but this is not an option. France does have some room for manœuvre. It could cut its huge ‘charges sociales’ that are the main pillar of finance for the country’s social welfare programmes, but are paid only by those who have a job.
Operation tax twist could switch a slab of the charges sociales over to value added tax and income taxes, which are paid by everyone, thus broadening the tax base.
This would not only drive another few tens of millions to lose further confidence in the government, with the president’s approval rating five months after the election now at a dismal 36 %, according to a poll this week.
It would also weaken domestic demand and add a few more tens of thousands to the unemployment list. But it might give a modest boost to exports.
The dynamics of the problem are the same for France as for Greece, Spain, & co. With a private sector in free fall as a result of the economic crisis, budget austerity adds a public sector in free fall as well and « We have a problem, Brussels : we’re about to crash ! »
As a matter of fact Brussels has a problem, too. The members of the club have put up some money to help the weaker members by lending them money. The loans, however, makes the debtors’ problems even worse and bring forward the day when they will have to default.
The members of the club could put more into the kitty that has been set up to help the floundering, but if this means lending more only to worsen the debts of the borrowers the scheme is entirely pointless, except as a means to delay the delay or reckoning.
There must be something I am missing ? Oh, yes . The alien at the ECB has offered to implement a policy that will hold down the rate of interest on any money the troubled members of the club can raise in the markets.
But Mother Merkel and all her relatives and friends, insulted to find that the ECB is not run by one of said relatives or friends, have insisted that any help from the ECB should be conditional on the states concerned imposing further ruinous contraction on their peoples.
There appears to be no end to the cycle that leads eventually to default.
But a happy ending to this story is possible. If the member states of the Eurozone were able to agree, preferably tomorrow, on the institutional changes necessary to enable the ECB to raise money jointly and collectively in the names of them all, and to buy treasury bonds issued by a Eurozone finance ministry, much would be gained.
This assumes that the peoples of the member states would be prepared to support legislation creating a federal Europe when it is put to parliaments and, in many cases, to approval by referendum.
In the present state of opinon, that seems unlikely, not least because Brussels is gripped by a belief that it must have far more extensive powers over the budgetary and fiscal policies of member states than any executive in any of the federal or confederal states in existence has ever even dreamed of.
Electorates are likely to regard this as putting national democracy to the knife.
Hilary Barnes is a veteran economics and business writer. He was for 25 years the Copenhagen Correspondent of the Financial Times, Nordic Correspondent of The Economist for part of that time, and published a paper newsletter, sold to international companies in the Nordic countries, called The Scandinavian Economies for over 30 years.