Monday, July 2, 2012

Coming Up Short

Didier Migaud, a Socialist, comments on the audit conducted by the Cour des Comptes, which he heads. The report indicates that slowing growth has reduced anticipated revenues to the point where France needs to find an additional €33 billion euros in order to reach Hollande's self-imposed target of under 3% budget deficit by the end of 2013.

A combination of €33 billion in spending cuts and tax increases should not be impossible to achieve. It amounts to about 1.5% of GDP. The question is whether a decrease in the state deficit this rapid is warranted, or whether, as Paul Krugman and many others argue, it will only slow growth still further, probably tipping France into recession and deepening the state's fiscal hole. Absent some new source of aggregate demand, this downward spiral will almost surely be the result of rapid belt-tightening. Belief in "expansionary contraction" has been shown to be a pipe dream.

Is there any hope of a revival of demand to compensate for diminished government outlays? It's not likely to come from the private sector, which has increased its savings rate in order to rebuild its battered balance sheet. It's not likely to come from China, whose economy has been slowing. Exports to the US may increase somewhat, as the US economy continues its own excruciatingly slow recovery, and a continued fall of the euro might help here as well, but not much.

France's European trading partners won't be picking up the slack, as most of them are operating under imposed austerity regimes as well. Germans might of course buy more French goods if they wished, but French prices are unlikely to decline very much over the next two years. Germany may need to purchase more electricity from France as it closes some of its nuclear plants.

So Hollande is in a box. If he does what the Cour des Comptes says is necessary to meet his own goal, he will probably fail. If he doesn't, he will open himself up to the charge of reneging on his campaign promise, and the Right will lambaste him for irresponsible economic management.

The right thing to do, in my opinion, is to delay the budget reduction for a year, to announce forthrightly, while he still has the public's trust and mandate, that the goal cannot be met. So this is a test of both Hollande's grasp of the economic realities and his readiness to face slings and arrows in pursuit of the right policy.


Carol Dent said...

Well, Hollande seems willing to let 600 million euros annually slip through his fingers by probably abolishing the auto-entrepreneur system for small businesses. He apparently isn't interested in getting any tax revenue in through small part-time businesses. Well that's OK, as everyone I have spoken to about it say they will just de-register, take out an enforced holiday and go on the dole...

bert said...

Imitate Rajoy, you mean?
What could possibly go wrong.

Didn't last week's summit effectively confirm his acquiescence to the fiscal pact? The price for his acquiescence was a spending programme amounting to 1% of eurozone GDP, much of it from existing funds.

He went in promising to tear it up. He came back having hung it with ornaments.

Mitch Guthman said...

I hate to keep beating this dead horse but as long as France is on the artificial gold standard of the euro, Hollande may not be able to continue to postpone budget cuts as the French economy begins to seriously contract. Apart from the effects of the shrinking economy on tax revenues, there is a fixed supply of euros and France will need to carefully husband whatever reserves it may have at this point to guard against bank runs (which I believe are soon to be a distinct possibility).

Remember, the size of France’s economy is not a buffer against bank runs. Even though the Creditanstalt was Austria’s largest bank at the time, the amount of money involved was trivial in the context of the country’s overall economy. Austria was a very rich country at the time. But because Austria was on a form of the gold standard, none of that mattered All that mattered was the amount of gold that Austria possessed. It didn’t have sufficient gold reserves to support the bank and the result was a global financial crisis and an intensifying worldwide depression.

France needs its own currency and a properly functioning central bank. It needs them very soon. Spain, Italy, Portugal and Ireland would also be much better off if a satisfactory means could be found for them to return to national currencies and having legitimate central banks.

bert said...

The latest Krugman column references Norman Angell's Grand Illusion.

Art's fantasy Flamby, leading a proud chorus of the Marseillaise, recalls a scene [.m4v] from Jean Renoir's film. I rather suspect the real Flamby will choose to continue mincing around in drag. Like Jean Renoir's father, Francois Hollande is one of the less impressive impressionists.

Anonymous said...

It will be amusing to watch as the socialist Hollande has to deal with reality. Maybe he can lower the work week yet again to perhaps 30 hours and institute retirement with full benefits at 50 years old for all French citizens as a couple of methods to fix the financial problems in France. That's about what his constituents want after all.

Mitch Guthman said...

@ Anynomous,

I would like to remind you that the current economic crises was caused not by the social welfare policies you condemn but by the colossal failure of laissez-faire capitalism and the rejection by certain highly conservative elements of the European elites of both Keynesian economics and fiat money.

The Socialist Hollande is boxed in not by the unreasonable demands of greedy French workers but the structural defects of the euro (which were pointed out long ago by liberal economists and political thinkers) and by the insane (but very conservative) decision to embrace austerity and the gold standard in the midst of a financial crisis, thereby turning that crisis from a mild recession to a full-bore depression.