Monday, November 12, 2012

The German View of France

According to Jean Quatremer, the reforms announced by J-M Ayrault in the wake of the Gallois Report have pleased the Germans.

Munchau: France Has Misdiagnosed Its Problem

Wolfgang Munchau thinks that France has misdiagnosed its labor market problem by analyzing in terms of competitiveness. He argues that the success of the German model, also misunderstood, is the reason for France's misunderstanding of its own situation. For Munchau, the problem in France is one not of wages but of total factor productivity. In other words, France needs to rejigger its product mix and move up the value chain in the composition of its output. I have taken a similar line in previous posts, but the point needs to be substantiated with a good deal more argument than Munchau provides here (or than I have provided). Munchau further clouds the issue by introducing youth unemployment, which is indeed a major problem but a separate issue from TFP.

Hollande's Moment of Truth

Tomorrow François Hollande will attempt to explain to the country where he is headed. I am eager to find out the answer. In anticipation, I can imagine two possibilities. First, Hollande might announced that he has had a conversion experience on the road to Damascus, that he now believes, as David Cameron does, in expansionary austerity. This seems unlikely, since it is not a doctrine widely embraced by the left, he didn't believe in it before, and no evidence that has emerged in the last six months is likely to have changed his mind--on the contrary. Or, second, Hollande may say that although he would like to stimulate the economy with deficit spending, his hands are tied with several strands of rope: the lack of confidence of the markets, the intransigence of Germany, and the difficulty of crafting a stimulus that will not allow additional government spending to leak out beyond France's borders to stimulate her neighbors rather than create employment at home.

Of course, he's unlikely to take this second position either, because it is a confession of weakness, which is the last thing he can afford right now, with his "presidential image" being questioned right and left. Indeed, he had vowed not to have news conference at the Elysée, but France2 last night reported that his PR advisors had recommended using the palace in order to demonstrate his physical occupation of the seat of power. The hope is that the majesty of the surroundings will magnify and solidify the quavering Flanby.

So what I expect is an onslaught of equivocation, a series of announcements of new initiatives in R&D, worker retraining, etc. There will also be, I expect, a moving paean to solidarity as a way of justifying both tax increases on the wealthy and the shift of the financing of social security to broader-based taxes (both CSG and VAT). There are some fine rhetorical opportunities here to disguise what is essentially a bitter pill that the left's base will be forced to swallow.

In any case, the occasion will be a moment of truth for Hollande, who has the unenviable role of leading the country in a time of profound retrenchment.