French Economist Gets it Absolutely Right!

Written by Hilary Barnes

“The satisfaction of seeing France finance and refinance its debt at historically low rates of interest is just the tip of the iceberg that is a France that is sound.”

This quote is from one of France’s leading economists, Philippe Askenazy, writing in Le Monde (January 21).

He thus joins Charles Wyplosz, professor of international economics at the Graduate Institute, Geneva, who made some of the same points in article at Telos.eu on January 4 asserting that France is not the economic wreck, being driven with foot hard down towards the abyss, that many foreign commentators and not a few French ones seem to believe.

Reading the deluge of comments over the New Year in the French media one felt that only a remark by Adam Smith (from memory) that “a nation can stand much ruin” could provide any comfort amid the slide into desolation. There were even those who compared France’s situation as 2013 began to that of June, 1940, when France was overrun by the German army in the course of a few short weeks and forced into submission and occupation.

The comparison is, frankly, hard to sustain. It is all part of the phenomenon by which when things are going well one happily ignores or plays down the weaknesses, and when they are going badly the weaknesses are exaggerated and endlessly discussed and analysed while the strengths are happily neglected.

Askenazy points out that while everyone moans about the catastrophic unemployment figures, France’s unemployment record since the great recession began is rather good. People should be asking why France’s unemployment is so low rather than why it is so high, he remarks.

France’s unemployment, about 10.5 % is better than the 11.8% average for the EU or the Eurozone. It rose much less rapidly when the financial crisis struck than in Germany (which has become the measure of all things economic in France). The reason was that Germany’s exports as a share of GDP are much larger than France’s, and it was exports that suffered most severely in the first stages of the present crisis.

On the other hand it is fair to point out that unemployment in France remained high relative to many other countries in the decade before the great recession set in. This is generally attributed in part, at least, to the rigidities of the French labour market which make if difficult and expensive to fire labour when times are bad and thus deter firms from hiring when times are good.

However, where the labour market is concerned, optimists, and Askenazy is among them, believe that an important break through was made in January this year when the social partners, the main trade union organisations and their employer counterparts, concluded an agreement that should make the labour market more flexible.

Just how this agreement is going to function when finally turned by the government and the legislature into a new chapter in the country’s voluminous body of labour law will depend on whether the trade unions want it to work.

A key measure is to facilitate work sharing agreements between the management and the employees of a firm, so that in periods when order books are thin working hours can be reduced and lay-offs avoided.

Renault, the auto maker, seems to be relying on the principles of this agreement to get the labour force to agree to measures to reduce the labour force in France by about 15 % over the next two years, mainly by attrition. But the employees have so far reacted with the kind of fierce denunciation of anything that the employers suggest that is so typical of labour relations in France.

Then there is the question of France’s de-industrialisation. When you look at manufacturing as a share of employment, there is a gap of about seven percentage points in Germany’s favour, 19.7 % to 12.8 %.

But if one adds manufacturing employment and employment in business services, the gap narrows to four or five points, about 24 % in France, 28 % in Germany. This reflects different ways of doing the statistics, with some categories counted as business services in France that are counted as manufacturing in Germany.

The French like to think it shows that the France have seen a bigger shift into high value-added service jobs than in Germany, but this is difficult to prove when you start looking in detail at the figures.

Askenazy, a director of research at CNRS (Centre national de la recherche scientifique, one of the world’s leading research organisations employing more than 30,000 people), is pleased to note that France remains attractive for world class research personnel, with a third of the personnel recruited by the CNRS in 2012 coming from abroad, most of them from OECD member states – and it is not because the pay is particularly good.

France is also attractive for foreign direct investment (as opposed to financial investments). The reason does not please official France. It is that for multinationals, whether French or foreign, France for corporate tax purposes is to all intents and purposes a tax haven. Clever accountants at companies like Google make sure (legally) that any tax on profits made in France happen to get paid in other locations. It is therefore no surprise that Amazon last year announced that it is setting up a new facility that will employ another 1,000 people in France.

And now for all the reasons why French bashing by publications such as The Economist and the Wall Street Journal are absolutely right!

There are 101 faults to be found with the way the economy, or perhaps one should say the political economy, of France works, but there is only one reason why it is a problem for the rest of the world, and that is not the fault of France (or not France alone) : it is the fault of the self-destruct principles on which the European Monetary Union as now constructed is based.

If the Eurozone were an economic union in the sense that the USA is, the financing of the imbalances between member states would be taken care of automatically through the banking system and federal-state transfers. It is no concern to any one in the USA if some states have a current account deficit and others have a surplus.

It is no threat to the stability of the USA if a state goes bankrupt and cannot pay its bills, firstly because those who finance state budget deficits know that states can go bankrupt and set limits to how much they will lend, and secondly because no state is going to default on its debts by introducing its own currency.

Neither of the two conditions above applies (or were applied) to the Eurozone. Member states were treated as sovereigns, although from January 1, 2000, they were no longer, monetarily speaking, sovereign any longer. The finance industry had either not cottoned on to this and therefore lent them far too much, or it had cottoned on but the banks counted on the same governments that had borrowed too much to bail them out the if there were any trouble, an ongoing process that continues to threaten the cohesion of the single currency system.

And Eurozone sovereign states believe they have the option to leave the single currency and reintroduce the drachma, the lire or whatever. If any of them were to do so it would probably unleash a chain default reaction in world financial markets, with catastrophic consequences for everyone.

If and when the Eurozone becomes an economic and political union, borrowing by the central government to stimulate domestic demand to lift it out of a recession will become possible. As it is, the only way that member states can correct imbalances is by budget cuts and tax increases, a process like blood letting: it makes the condition of the patient worse.

That is why Askenazy concluded his article in Le Monde : “Everything is not perfect. But there is real hope – on condition that Europe can escape from the gangrene of austerity.“

Absolutely right !