François Hollande’s Prime Minister, Jean-Marc Ayrault, claims the new budget (unveiled on 28 September) is ‘fair, economically efficient and allows France to meet its priorities’. In the carefully chosen words of the Guardian’s economics editor, Larry Elliott, the claim is ‘total moonshine’!
It is true that more than half the €37bn in planned budgetary savings is designed to come from increased taxes on rich households and large companies whilst—in contrast to Britain—cuts in government expenditure spare the poor and the elderly. Particularly welcome is the new 75% tax band for those earning over €1nm a year. But whatever gloss one puts on it, the budget is about reducing the deficit from the current 4.5% to 3% new year—and to near zero by 2017. With the French economy stagnating over the past 9 months and persistent unemployment of 10% or more for over a decade, budgetary austerity—however achieved—is most definitely not the answer.
The success of this budget depends on two key assumptions. The first is that greater budget discipline will bring a return to private sector growth, or to use Paul Krugman’s expression, greater discipline will inspire the ‘confidence fairy’. Thus, the growth rate in 2013 is assumed to be 0.8% rising to 2% annually for the period 2014-2017. But elsewhere in Eurozone austerity is resulting in growing unemployment and stagnation. And a stagnating economy causes budget deficits to widen. For France to reach even the above modest growth target and to reduce its deficit, a strongly reflationary budget would be needed, particularly under conditions of generalised austerity throughout Europe.
Secondly, Monsieur Hollande’s Prime Minister claims that reducing the budget deficit will enable France to retain the confidence of financial markets and therefore to enjoy continued access to cheap credit. This too is nonsense. Throughout Europe, young people are increasingly angry about unemployment and growing job insecurity. As the French economy continues to stagnate, scenes now seen in the streets of Athens and Madrid will spread to Paris. Financial markets may be impressed by austerity in the short term, but in the longer term nothing rattles financial markets more than political unrest. An austerity budget today sets France firmly on the road to unrest in the coming years.
Why then has Monsieur Hollande reneged on his election promise to reject austerity? Why indeed is France going to ratify a so-called Budgetary Pact (TSGC: Traite sur la stabilité, la gouvernance et la coordination) which entrenches the Golden Rule of eventually reducing the annual structural deficit to zero. Some economists of the PS (Parti Socialiste) know perfectly well that such a rule is not merely illogical, but adopting it means abandoning discretionary fiscal policy altogether (having already ceded monetary policy to the ECB.) The pact has already created much discord in the PS and its governing allies; eg, Europe-Ecologie-les-Verts (EE-LV) voted against it in late September, resulting in the departure of the MEP Daniel Cohn-Bendit.
The answer is as simple as it is perplexing. François Hollande wishes to please the Germans. He wishes to please not just Frau Merkel—whose coalition will collapse next year—but the German social-democrats (SPD) whose economic beliefs are not so different from those of Merkel’s CDU. Crucially, Hollande’s argument is that if France is to retain its leading role within Europe and the Eurozone, in the short term it cannot afford to anger either the financial markets (and follow Italy and Spain into spiralling borrowing costs and insolvency) or the northern European austerians.
What is perplexing is that the combination of an austerity budget today and the Budgetary Pact (TSGC) tomorrow ultimately condemns France to long-term economic stagnation. This in itself will kill Monsieur Hollande’s European aspirations. Ironically, some of today’s socialist ministers who in 2005 voted against the EU Constitutional Treaty (eg, Bernard Cazeneuve and Laurent Fabius) now support the TSGC. Indeed, Elizabeth Guigou (Minister in the 2003 Jospin government), who is on record as strongly opposing the Pact, is now willing to vote for it. The so-called ‘sovereignty problem’, much discussed by both the left and right in France, is in reality a red herring.
The fundamental issue is about economics. Unless the left of the French socialists forces a change of course, the PS and the centre-left in France will ultimately suffer grave damage. What is need is not austerity, but a massive stimulus to get France—and more generally the EZ—moving again.
Sadly, throughout Europe, the timidity of the social-democratic response to the economic crisis is resulting in unemployment and disillusion of a scale which threatens to destroy social democracy within a generation.
#1 by Victor on October 2, 2012 - 12:35 am
Neither stimulus nor austerity is what France can afford economically or politically. The first wouldn´t work, because Europe´s economy is already in a downward spiral. The second would agravate what´s already happening.
France does well in going with moderate proposals as long as Germany follows through and doesn´t block the gradual deepening of integration (creation of the banking union with the ESM as backstop).
As regards the Fiscal Treaty, it merely replicates the Stability and Growth Pact that was never used as punishment. As it doesn´t require pro-cyclical policies, there is nothing to be actually criticized.
If the French (and the other mostly ageing European people) want to apply stimulus or make investments, this should be done after getting control of public finances.
There is nothing in the Treaty that prevents raising taxes to do this. In this ideological debate what should matter is not whether the budget is balanced, but on whose backs it is balanced.
European social democrats (as well as Americans) have failed to focus on balancing competitiveness with fairness. The Germans and the Scandinavians have actually now demostrated that you don´t need to completely sacrifice one to get the other.
The real problem is that raising wages in the West requires both dealing with the trade imbalances with China and doing it simultaneously in all of the countries that could now afford to.
In Europe, Germany has pushed wages to go down, thereby denying the European ideal that integration would lead to convergence. But the fact that southern economies will probably never be as competitive means convergence could only come with a transfer mechanism that has no chance of being established anytime soon.
Ironically the current developments allow Germany to raise wages at the same time that it demands other countries to lower them. The exact opposite of what the EU was supposed to be about.
The real challenge for the European left is to once again give meaning to the EU through proposals that lead to convergence in living standards either at the regional or global level.
#2 by Ronald Grünebaum on October 2, 2012 - 5:40 pm
Irvin is again at odds with logic.
Did not Germany follow the path of budget constraint while improving its competitive position through a bundle of measures?
This path has paid off as everybody accepts. But nobody wants to apply the same path to their own economy and happily pretends that Germans must somehow be totally different economic animals.
At best this just shows lack of knowledge of Germany, at worst it is germanophobic.
The truth is that the “stimulus” that southern EU countries crave (hiding behind a wrong understanding of Keynes and expecting that all is paid with German money) is nothing else than a codeword for the easy life at the expense of others.
The current crisis is the result of over-indebted states which completely failed to react to the forces of globalisation. If the South want to be taken seriously as EU members it needs to come up with something better than living in the past.
#3 by Pedro on October 2, 2012 - 8:38 pm
George Irvin, being from little england, should concern himself with whether the not-so-united kingdom’s budget for 2015 includes Scotland.
#4 by Marcel on October 5, 2012 - 12:31 am
What #1 Victor forgets is, that ever since the start of this socalled crisis (which in reality is a correction, not a crisis) that the increased central planning and ‘more power to the Eurosoviets’ have only made things worse.
And if countries had their own currencies back, people wouldn’t be exposed to other countries debts in the way we are now.
Europe needs no EU, Europe needs no Euro. All we need is economic cooperation and a fair trade zone (note I didn’t say free trade zone). Getting people to bail out not just their own thieving bankers, but other countries thieving bankers as well is pure criminality. The Euro is our bane.
Stimulus however doesn’t work. Never has, never will. Well it works to get debts up, but that is about it.
#5 by Victor on October 6, 2012 - 1:00 am
Apart from the whole EU or not argument, your whole philosophy is basically premised on things that have never been proven, while deriding things that have worked in the actual world (stimulus).
This comment is not based on reality (economies exposures to each other) and advocates something merely idealistic with two concepts that are cute, but hypersimplistic (fair trade and economic cooperation…whatever those are).
People on the left and the right fringes think exactly alike in the end.
#6 by Paul on October 21, 2012 - 9:30 pm
Victor I am observing your posts for the past 1,5 year and your philosophy is trapped in a cynical neo-liberalism which separates rather than unites the European continent. To my humble perspective, in specific EU member-states separationists are patronized by ‘pervert’ (I apologize for the diction) neoliberals.
Your arguments seem to follow Berlin’s guidelines. Are you paid for posting pro neoliberal comments to influence European public opinion?
I am repeating Hans Swoboda: “‘more united than ever’” against Merkel.
#7 by Wim Roffel on October 8, 2012 - 11:39 am
Spain and other Southern countries nowadays face very high interest rates. If France would adopt a free spending policy it might well see its interest rates rising too and soon it would find itself spending all that extra money – and maybe even more – just on interest rates. So stimulus is not really an option for France at the moment.
On the other hand it is a very sound policy that the rich should pay for most of the reduction in national income. Sudden major reductions in the income of the poor can have major consequences for trust in the economy and consumer spending. The rich are less vulnerable.
But one can wonder whether Hollande has chosen the most suitable taxes…
#8 by Paul on October 16, 2012 - 2:39 pm
Hello friends!
Talking about France’s budget Mr. Schauble’s austerity mania comes to my mind.
Why???
Because Mr Shauble and austerity are inextricably interwoven!
Mr. Scahuble wants to transfer the Social Policy from the European Commissioner for Employment, Social Affairs and Inclusion to the European Commissioner for Economic and Monetary Affairs. That is, he wants to make Eurozone an entity that will be functioning under the austerity measures. Dear Mr. Schauble this will NEVER NEVER NEVER ΝΕVER happen.
Peoples of Europe rebel now!!!!!!
Bear this in mind!
#9 by Lynne on October 25, 2012 - 1:58 pm
Dear Mrs Merkel,
Dear Mr Schauble,
The Hellenic Republic will NEVER become a puppet of your internal politics. So, forget once and for all your volition for trust accounts and international financial control.
Thank you!