Who can deny that Francois Hollande has a serious problem? Polls show his popularity has plummeted–that only just over one–third of the public still support him. In his press conference speech on 12 November he sought to convince a growingly sceptical public that he can turn France around, that “decline is not our destiny.” Yet to combat rising unemployment, dying industry, low competitiveness, stuttering growth and the threat of recession, the government produced a tough October budget and promised to further reduce the deficit to 3% by next year.
The gap is to be closed by €20bn of tax increases and €10bn of budget savings, the latter entirely from public sector spending cuts. Furthermore, Hollande wants to reduce public debt by €50bn over his term of office. “I’ve made the decision to force the pace, to bring France out of debt and to balance the public accounts,” he said. “We should be able to do much better as a country with lower public spending.”
But the budget-balance target is based on growth estimates for 2013 of 0.8%, which few economists consider realistic. The French economy, according to the Bank of France, is expected to contract in the fourth quarter of this year, and probably did so in the previous three months, following three flat quarters. Further budget cuts are considered all but inevitable next year, and such cuts will almost certainly lead to further stagnation.
Monsieur Hollande came to power promising to challenge the German-led orthodoxy of austerity facing not just France but the whole Europe. But his only serious challenge to austerity was in an interview given to The Guardian in mid-October. In his election campaign, he promised to seriously renegotiate the ‘Stability Pact’. Instead, he has pushed it through the French Parliament with only cosmetic changes. In reality, Hollande’s economic policy seems founded on the notion that cutting spending makes a country more competitive and leads to growth, a proposition which the current state of the EU economy shows to be palpably false.
This is not to deny the parlous state of the French economy, but merely to assert that ‘austerity’ is not the answer.
The only way for France (and the EU) to grow is by increasing spending, particularly public spending which is the largest component of French aggregate demand. To do this, the government must be prepared to borrow more in the short term, and in the longer term further tax the rich, closing corporate and private tax havens and reversing the recent growth in inequality which France has experienced. Nor does it take much imagination to see that increased public spending is crucial if France is to lead in combat the calamitous market failure which has led to climate change.
All this may be unpopular with the financial markets which will almost certainly force up borrowing costs, but higher borrowing costs can be financed out of faster growth. Of course one can argue that this budget was only the first, and that the real test will come after the German general election of 2013 where Peer Steinbrück is the SPD candidate. Assuming the SPD wins–and further, that it can form a coalition with the Greens rather than the CDU–this might open the way for a change of course for Germany away from austerity and towards rebalancing Eurozone trade and raising German domestic wages.
Indeed, just as in the case of the ‘Club-Med’ countries, it is illusory to think that cuts will make the country more ‘competitive’; France’s current account trade deficit mirrors Germany’s trade surplus, and the answer to France’s problems cannot be found in ‘internal devaluation’. Only growth will bring with it the new investment embodying ‘competitive’ technology. But what are the chances of such a change of course in Germany? And even if Steinbrück wins, one cannot help but recall his dismissal of ‘crass Keynesianism’ in 2008. Seen in this light, the hope that an SPD-governed Germany will encourage France to abandon its current economic course seems quite illusory.
The political implications of continued French economic stagnation–Hollande’s surrender to economic orthodoxy–are just as clear. Like Nicolas Sarkozy, Francois Hollande could become a one-term President, and if Hollande and the PS are voted out in 2017, the outlook for the left will be dire.
Mr Obama’s recent victory in the United States would almost certainly not have been secured in the absence of the bailout of General Motors and the fiscal boost provided for the economy in early 2009. Obama’s Democratic critics argued that he did too little–Monsieur Hollande’s progressive critics (both within and outside of the PS) are saying that he is doing precisely the opposite of what needs to be done!
The difference is that Hollande is less than a year into his presidency–and there is still time to change.