Will Socialist France help the Euro economy?

The election of Francois Holland as French president is important for changing the dynamics of the EU. There is currently a strong acceptance of the need for continued austerity and fiscal targets. However, under the weight of soaring unemployment, European voters are becoming increasingly disenchanted with this recipe for low growth and high unemployment. But, will Holland’s election make a real difference to Europe?

 

An end to short term austerity?

The EU fiscal compact places very strict targets on fiscal discipline. Given the state of Eurzone economies, this has exacerbated the slide to negative growth. Spain is in double dip recession, Greece is in free fall. Ireland’s output is well below crisis peak. EU Growth figures frequently ‘disappoint’ Austerity measures in Portugal, Spain and Greece are proving, to a large extent, self-defeating. The decline in growth prospects has caused rising bond yields and falling tax revenues. There are hopes that the backlash against austerity may encourage the EU to adopt a much more flexible approach to reducing debt, allowing a higher priority to economic growth.

Economic Growth v Inflation.

The ECB still gives excessive importance to inflation. Given deflation in the southern periphery, it would make Eurozone adjustment much easier, if Germany could allow a higher rate of inflation. Given Germany’s huge current account surplus, there is a need for higher consumer spending in Germany. But, will the ECB be willing to tolerate higher inflation? I doubt it. Their past and current actions show that they are unwilling to change their rigid adherence to low inflation – even though there are much more serious problems in the economy. There is not much any French president could do about that.

The Supply Side

For many  a ‘growth compact’ means introducing some supply side policies to increase EU productivity and labour market flexibility. At best, these can give a modest boost to medium term growth. Given levels of regulation and inflexibility, structural unemployment has been high in Europe – well before this crisis (especially for youth unemployment). There is definitely scope for supply side policies to give improvements. But, in the current crisis, this is only part of the solution. To rely purely on supply side reforms will not solve the immediate collapse in demand.

In this regard, Holland doesn’t inspire confidence. France has one of the most regulated labour markets in Europe. There is a need for greater labour market flexibility to contribute to reducing youth unemployment. Yet, if anything, he is promising more regulation and more labour market protection – attractive to those in work, but not for the ranks of the unemployed.

Deficit Reduction

Given the long term structural deficit France is facing, the idea of reducing pension age in France from 62 to 60 is hard to understand. Holland has the right idea to promote short term growth and reduce long term deficit. If you want to do this, it would make more sense to increase working age. The idea of reducing retirement age  to 60 doesn’t make sense given economic and demographic situation.

 

Overall

It is important Europe places growth and reducing unemployment to the top its agenda. Given constraints of Eurozone, it is vital Europe doesn’t get stuck on a self-defeating cycle of austerity, low growth and stagnant economic growth. Europe needs to be brave and tolerate higher inflation. Germany needs to see growth of other countries in its own interest. There needs to be some kind of Eurobond to give more time for long term deficit reduction. In these points, the election of Holland gives hope. At last, Europe is becoming more aware there is an alternative to austerity.

On closer inspection of Hollande’s policies I’m less sure. I don’t see the wisdom in promoting a lower retirement age, and dramatically increasing taxes (France already has one of highest tax rates in Europe)

At least Holland has part of the equation correct. But, Europe need both.

  • Demand side policies to promote economic growth
  • Eurobonds to help stabilise debt situation
  • Acceptance of some labour market policies for greater flexibility.
By on May 7th, 2012

One thought on “Will Socialist France help the Euro economy?

  1. Hello, I was wondering if you could help clear up for me how Fance has not balanced it’s budget in 30 years as many websites are reporting. And yet it only recently lost it’s triple A credit rating. Am I missing something here?
    Thanks,
    Pete

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