Sunday, June 17, 2012

Hollande's "Growth" Package

Hollande is proposing to France's European partners a growth package consisting of 3 parts: EU structural funds of 55 billion, European Investment Bank loans of 60 billion, and project bonds of 5 billion, for a total of 120 billion euros, or less than 1% of EU GDP. This is not likely to make much of an impression, even if it is approved, but with New Democracy's apparent victory in Greece and a reinforcement of Socialist power in France, Germany may be inclined to reward the Greeks for good behavior and the French for making such a modest proposal.


Mitch Guthman said...


I think the inadequacy of this proposal is much more disappointing and a little bit scarier than you think, especially because I think Hollande is making the same mistake that Obama made when he first took office. If Hollande honestly thinks this will get the French economy back on track he is deluding himself. If he thinks he can do this a bit at a time, he’s deluding himself about that, too. Similarly, if he thinks that he can reassure centrists or insulate himself from criticism by the UMP with the sort of proposal that Sarkozy might have made had he won reelection, he is badly misjudging the very limited window of opportunity that’s opened for him.

He’s got one shot at this thing and my feeling is he needs to do something big. France turned to Hollande and the left in a time of crisis because it had lost confidence in Sarkozy and the UMP. What the people of France ultimately want is results. Nothing matters except the result. He cannot afford half-measures. He cannot afford to fail or the left will be out of power for the next 50 years. If he get the economy moving again and achieves a good result for Europe generally, the PS could easily replace the UMP as the new normal. Otherwise, the left would have been better off if Sarkozy had been reelected so that he could take the fall.

(To anticipate: Yes, it’s true that Hollande might not be able to push through what he wants but he’s simply got to confront Germany at some point. It will be difficult. But , realistically, he’s never going to be more popular or more powerful than he is at this moment. He needs to take Europe away from Germany and lead it in the right direction. He needs to do that right now. Even if doesn’t get all that he wants and the economy improves only slightly, the French people will at least see that he is fighting the good fight for them. To be sure, being seen as fighting for the people is a poor second-best substitute for success but it’s better than the third best thing in French politics, namely, defeat and oblivion).

bert said...

There is strong mood against austerity, so Hollande is for growth. There is strong opposition to raising the retirement age or touching the privileges of key client groups, so Hollande will defend these privileges. There is strong pressure against ongoing deficits, so Hollande says he will cut the budget in line with the fiscal pact. There is strong pushback from Germany against a Keynesian growth strategy, so Hollande proposes a package one sixth the size of Obama's effort in 2009.

In the States, he'd be contemptuously called a squish. In France, he's called Flamby.

Mitch, I don't think there was ever a prospect of what you're calling for. It would involve placing France alongside Spain and Italy. Not only does a French president not want to recast himself as king of the latin midgets. Also, Rajoy (Partido Popular) and Monti (Bilderberg Group, Trilateral Commission, Goldman Sachs, unelected with elections due next year) don't make natural allies for the PS, to put it mildly.

Hollande is a can-kicker. Not change, more of the same.

Anonymous said...

I am not trying to be argumentative - I would honestly like to understand what you are saying Mitch. Germany is growing, it's economy is working in a way France seems to envy, yet you say Hollande must "confront" Germany and "take Europe away from Germany." Shouldn't Hollande be moving France toward the German model, not away?

Mitch Guthman said...


I called for Hollande to take the lead in moving Europe on a course different from the one Germany has set because I believe, to use the words of Paul Krugman, that the policy of expansionary austerity is “just insane” and is pushing “depressed economies even deeper into depression.” If Europe continues on it present course, I believe it is likely that we will see another terrible crash and a depression that will rival and possibly dwarf that of the Great Depression.

The German economic miracle didn’t happen just because they tightened their belts or reformed their labor markets. It happened because of the structural imbalances in Germany’s favor inherent in the euro and because there was a huge influx of capital into the PIIGS and the countries of the periphery resulting in booms, which in turn resulted in higher levels of inflation and consumption of mainly German products. Since the adoption of the euro, Germany has run huge trade surpluses against nearly every other country in the Eurozone, including Greece, Italy, Portugal and Spain. Krugman argues that Germany was able to do this not because of the reforms but because the adoption of the euro meant it had a large decrease in its costs and prices relative to other euro countries because of the inflation in the countries of the periphery I mentioned.

Consider the Spanish example. Essentially, the banks in Germany sent massive amounts of capital into Spain. Thus helping to fuel the housing boom (selling houses to mostly English expats). This, in turn, created some modest inflation which meant that the Spanish people could buy more high quality stuff made by Germany with money lent to them by the German banks. The housing market got hotter, the German banks lent more based on the inflated housing values and the Spaniards used their slightly inflated incomes to buy even more German stuff which resulted in even greater German trade surpluses.

When the Spanish housing market crashed, the Spanish and German banks were stuck with lots of shaky debt, which austerity made worse by destroying the Spanish economy. Massive decline in GDP, massive decline and stagnation in all areas economic activity and horrendous unemployment. But also, a problem for Germany of basic arithmetic. Austerity in the periphery isn’t just destroying the lives of most people in places like Greece and Spain----it’s also starting to reduce the demand for German products in those countries. That means that while Germany was growing in the past (partly because of its structural advantages that were baked into the euro and can’t be shared by the PIGGS).

Moreover, Germany almost certainly isn’t going to be growing in the future. In fact, its economy will quite possibly soon be in much worse shape than that of France because it turns out that the German model isn’t compatible with austerity either. A surprisingly large percentage of the stuff that Germany makes gets sold to other Europeans. If they don’t have any money, they can’t buy any more stuff from Germany. If they stop buying German stuff, that’s the end for Germany. That’s why we need some kind of reform policies to get the economies of Europe growing and to buoy up demand. I have advocated both a functioning central bank and various stimulus programs as advocated by the Keynesians. I strongly recommend recommend Paul Krugman’s new book “End This Depression Now!” which explains all this far better than I can and also offers what I believe is a path out of this depression.

If it was available in French, I would advocate that we take up a collection to buy a copy for Hollande and everyone in his government. I think they would learn something important about the kind of programs Hollande’s government need to propose for France and Europe. Also, the mere act of buying so many copies would itself be a micro-stimulus program.

Mitch Guthman said...


I don’t disagree with you about Hollande’s temperament. I just think that we’re fast reaching the point where it won’t be possible to keep the can down the road. The half-life of these various half-baked euro fixes has been deteriorating rapidly and I fear that we’re running out of road.

I believe that Hollande and the socialists have been given majorities more as a reaction against the failures and excess of Sarkozy’s UMP. The French weren’t so much enthusiastic about Hollande as they were disappointed in Sarkozy’s unevenly applied policy of austerity and they were disenchanted with him personally.

Nevertheless, cipher though he may be, Hollande is Europe’s last best hope for getting out of this disaster in one piece. The other Europeans nations may no more enthused about Hollande than the French but they need to realize that he may all that stands between them and catastrophe. Hollande must be bold with his program for growth and prosperity. He must reach out to the other Europeans and tell them that they can have prosperity with Paris or murderous austerity with Berlin.

If Hollande can grasp the nettle there is a good chance of a return to prosperity in Europe and for the center-left to become dominant in Europe for generations. His window of opportunity was vanishingly small and grows smaller every day.