Tuesday, June 5, 2012

The Rent Control Decision

I commented earlier on Cécile Duflot's announcement of a new rent control measure as a political ploy. In that sense it may be successful as an appeal to the left of the Left. As economic policy, however, it is more questionable. France unquestionably suffers from a shortage of housing. It also has a very high unemployment rate. The obvious thing to do would seem to be to put unemployed workers to work building houses, no? So why not try that instead of controlling rents?

Well, one reason is that "the coffers are empty," as Sarkozy used to say. But this is not entirely persuasive, given Hollande's pledge to stimulate new investment via some kind of public investment bank. New housing would be an obvious choice, since the demand is known to exist. To be sure, there would be a lag before the pressure on rents was alleviated, but a lag is better than an imposed rent control that is likely to choke off any new supply of housing.

Another reason is the current credit squeeze, as investors fly to safety. But it would be better to put some of this capital to work building houses than parking it in sovereign debt yielding close to zero. A better use of the government's prerogatives would be to devise incentives to funnel this money where it's most needed.

Perhaps, after the legislative elections, France can debate this issue rather than rely on executive orders to impose rent control. One hopes that the turn to rent control as a sop to the left of the Left is not a sign of the direction that Hollande intends to go in economic policy. This is a bad decision, but it is not yet set in stone. There is still time to revise it after the elections. Matt Yglesias offers a similar analysis here.

Legislatives: Looking Good for the Left

Polling shows the Left doing well in the upcoming legislative elections. The French apparently don't like cohabitation and, despite J.-F. Copé's ominous warnings, seem prepared to let the Left has its chance to see what it can do. Surprisingly, the Left is also doing well in the overseas districts created by the UMP in the hope of adding to its majority during the fat years.

Rent Control, Nuclear Control

Cécile Duflot has announced a measure to limit permissible rent increases in case an apartment is rented to a new tenant. There is perhaps less than meets the eye in this measure, since the allowable increase is linked to an index of rents that is itself increasing. But the announcement is a useful crowd-pleaser in advance of the legislative elections and pending a promised new law on rents.

Meanwhile, there are rumors that Hollande might oust Henri Proglio from his post as head of the nuclear firm Areva. On the other hand, Hollande's promise to cut French dependence on nuclear-generated electricity from 75% to 50% by 2025 has now been downgraded, according to some advisors, to a mere "aspiration."

So it's interesting that Cécile Duflot, who comes to the Socialist government from the Greens, is the minister who is tasked with announcing the rent-control measure, which will please the left of the Left, while her own Greens, who didn't contribute much to the Hollande victory, are left to wonder what became of their dream of shutting down the French nuclear industry.

Euro Deal in the Offing?

Outlines of a euro deal have begun to leak. The plan would be to absorb all "non-Maastricht compliant debt," that is, national debt exceeding 60% of GDP, into a fund that would be paid off by all member states over 25 years. In exchange, members states would give up additional control over their national budgets to a central authority, although it remains sketchy what this would entail.

Clearly, the crisis has entered a new stage. Portugal announced an infusion of new capital into its banks, and Spanish banks have been in the news for weeks. So the Germans are ready to make their move, lest the whole system collapse, and now we will see what they want in return for their cooperation. The price is not likely to be small, and the political ramifications in the south will be interesting to watch.