Friday, July 13, 2007

Further to the Foregoing

Continuing the line of thought opened in the previous post, it's odd that Sarko's critics in the blogosphere, who are generally opposed to what they would describe as his "neo-liberal" tendencies (how I detest the mindless use of that term!), are so gleeful to report that he has been spanked by a cabal of allegedly neo-liberal finance ministers and central bankers.

As to the substance of the case, the severity of the Eurogroup ministers might be thought to be out of proportion to the offense. Sarko's tax package will cost an estimated $14 billion euros, or just under 0.8 percent of France's $1.8 trillion euro GDP. But any inflationary implications of the additional budget shortfall have to be interpreted in light of the total Eurozone GDP of 15 trillion euros. The French deficit increment thus amounts to less than 0.1 percent of Eurozone GDP, hardly enough to cause a central banker's eyebrow to twitch, especially now that Euroland is expected to lead the global economic upswing with a growth rate higher this year and next than that of the US. (For comparison, note that the current cost of the Iraq War is estimated at $120 billion per annum, or 1 percent of US GDP. If Sarko were to sell his fillip to aggregate demand as a war on something or other, would the financiers be as silent as they've been about the economic consequences of the so-called War on Terror?)

The Eurogroup's real beef with Sarko is that he's free-riding on the budget restraint of other Eurozone countries, chiefly Germany. But Germany is currently riding the upside of the business cycle. With the strong euro, however, German consumers are tempted to spend their gains outside Euroland, where relative prices have declined dramatically. France isn't getting as much of the benefit of German demand recovery as it might, so Sarko is helping himself. His is a calculated, not a foolish, gamble and might well pay off handsomely. The proper angle from which to criticize him, in my view, is the effect of his tax package on inequality, already growing in France and elsewhere in Europe, rather than from the point of view of the ECB or the Stability and Growth Pact.

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