Wednesday, March 4, 2009

Automatic Pilot

Automatic stabilizers--spending items built into the budget that will automatically put the state in deficit in a downturn--are supposed to exert a countercyclical effect on the economy. If so, the announcement that the French budget will be in deficit by 5.6% of GDP this year should be received as good news:

Le déficit de l'Etat devrait atteindre 103,8 milliards d'euros en 2009 et les déficits publics (Etat, collectivités, comptes sociaux) devraient s'élever à 5,6 % du PIB, selon les prévisions inscrites dans la loi de finances rectificative, a-t-on appris, mercredi 4 mars, de source gouvernementale. (AFP)

This deficit will bring French debt outstanding up to about 70% of GDP. Both figures are well in excess of the Maastricht limits of 3% and 60% respectively. The problem for Sarkozy is that he now has no room to maneuver. His targeted crisis responses cost about 2% of GDP, and the automatic stabilizers make up the rest. To go much farther than this would be more than is justified by the current level of unemployment. So it will be difficult to seize the opportunity to turn state spending in new directions, as Obama is trying to do in the US: "A crisis is a terrible thing to waste," as Rahm Emanuel has said. Perhaps that's why Sarkozy hasn't been proposing much beyond a bailout of the auto companies, which now, with Toyota joining the march to the trough, seems global. He knew he wouldn't have the money to spend.