Tuesday, September 11, 2007

Social VAT

Christine Lagarde has submitted an "interim note" on the social VAT to the prime minister. The analysis of the likely effects of the proposed new tax is detailed and subtle. In particular, she concedes that prices would rise, at least initially, and that this would trigger further price rises through various indexing mechanisms (the SMIC and retirement benefits are indexed to the price level). Active market intervention would probably be necessary to counter this. Furthermore, although one of the supposed benefits of the social VAT is that it is a disguised form of protectionism (by lowering the production costs of French producers relative to foreign producers), the greatest impact in hiring would be on low-wage jobs in the service sector, which is immune from foreign competition in any case. The effects on employment in the industrial sector are more doubtful. There is much more in the note, which I recommend to anyone interested in the details of fiscal policy.

Lagarde deems the measure "not propitious" at this time. Note that she and Eric Besson seem to be at odds on this. I read this as an indication that the social VAT is definitely back-burnered for the foreseeable future. The Besson report is here.

Industrial Policy


Anyone still operating under the illusion that Sarkozy is "un néo-libéral anglo-saxon" should take a look at today's announcement by the Elysée. After apparently acceding yesterday to Angela Merkel's wish to continue the German firm Siemens' minority share in the French nuclear power company Areva (Siemens owns 34% of Areva's reactor subsidiary Areva NP), Sarkozy is nevertheless continuing with plans for a privatization of Areva and a merger with Alstom (formerly Alcatel-Alsthom--what happened to the "h"?) and Bouygues. The rub here is that Siemens and Alstom are direct competitors in parts of their operations (electrical generating equipment). In any case, after the GDF-Suez merger last week, we now have confirmation of another major industrial policy coup in the works.

For the German reaction, see here (French) and here (German). Sarkozy claims to be planning for Europe's future, when the oil and gas have run out. Nuclear energy is the only alternative, he insists. German environment minister Sigmar Gabriel says that Sarko is merely pushing France's comparative advantage in nuclear energy and accuses France of technological backwardness in regard to solar power and other alternatives. In this dialogue of the deaf, Sarko appears to be the realist, however, and Gabriel the ideologue ("Sarkozy ignores the fact that most EU states have no nuclear power and don't want any").

Still More Special Regimes

Éloi Laurent (see comment to previous post) thinks I'm too optimistic about the prospects for a peaceful resolution of the retirement reform issue:

And yet, I don't share your optimism, if the government, God forbids, wants to rush this so to gain the upper hand, say, on the labour market reform. Because trade unions are wounded, they are even more dangerous. And the government has no money left for appeasement purpose. The good thing is that, contrary to 1995, we Parisians now have the Vélib'!


But the reason I'm skeptical that this clash will eventuate in a paralyzing strike is that I don't think Sarkozy will push to the brink or reform by decree. As with university reform, he is now perfectly positioned to appear to offer a compromise when he speaks on the issue on September 18, one week from now. Je vous ai compris, he will say to the aggrieved workers. Il ne faut pas désespérer Billancourt, he will say to his inner circle. Precisely what form this tactical astuce will take, I wouldn't venture to say. My guess is that it will be to defer details of the special regime reform to firm-by-firm negotiations, further to isolate the more militant SNCF workers from the rest of the group, and then offer some sweeteners to various categories of railway workers in order to divide and conquer the remaining hard core.

Looked at this way, Fillon's gaffe on Sunday might not even have been a gaffe but rather the "bad cop" half of a good cop/bad cop act--the same role that Pécresse played in the university negotiations. A head fake to focus the opposition's attention while Sarko, Tony Parker-like, drives to the basket. If I'm right, I think Sarkozy will have set a pattern of rule for the next five years. If I'm wrong, I'll stake Éloi to one Vélib ride--if he can make his way to the bike stand through the scrum of stranded commuters, picketers, CRS, etc.