Sunday, September 7, 2008

The One-Percent Solution

Christine Lagarde, who not so long ago was looking forward to a growth figure above 2 percent for 2008, and who later revised her estimate slightly downward, has now backpedaled all the way to 1 percent. This is no surprise to most observers outside the government, but it is an awkward admission for the Minister of Finance at a time when the UMP is in open rebellion over the proposed new tax to finance the RSA. The reduced growth estimate means that the projected deficit must be revised upward, raising the possibility of still other new taxes as the deficit pushes beyond the 3 percent SGP limit. When Sarkozy finally does get around to appointing a new government, his moves in the economic arena will be closely watched. If he opts for austerity and a policy of contraction, as the neoliberal faction would have him do, he will be going against all his politician's instincts. If he doesn't, he will preside over a sharp rise in the deficit and have to face criticism from the opposition, the ECB, and some EU officials. Forthcoming unemployment figures probably won't look too rosy, either, so it will be hard to argue as he did after the last round that his TEPA tax package is working. Even if he concludes that it was the wrong medicine in the wrong dose at the wrong time, it's too late to administer an antidote. The patient has already metabolized the drug, and the unintended effects can at this point only be managed, not forestalled. Many will find the doctor in retrospect guilty of malpractice, even if the treatment he administered was well within "community standards" (the European community, s'entend). What to do? The response will be a test--perhaps the test--of Sarko's political skills.

Meanwhile, Jean-Claude Trichet seems bent on defying my prediction of yesterday that he would be forced to bow before the reality of recession and unemployment. I may yet turn out to be right--indeed, I stand by my prediction--but for now Trichet is determined to be more Catholic than Pope, or at any rate more German than the Germans, on the issue of credible commitment to price stability. Will this lead, as Le Monde suggests, to the patient dying of good health? On verra.