Saturday, April 28, 2012

Turning the Tide on Austerity

This week the Economist places Fran├žois Hollande, the socialist presidential candidate who is likely to win the election in France on May 6, on its cover with the headline "The rather dangerous Monsieur Hollande". A socialist in charge of Europe's second-largest economy is apparently cause for serious concern.

But why? France is overburdened with a massive welfare state and needs to make changes, argues the Economist: "Public debt is high and rising, the government has not run a surplus in over 35 years, the banks are undercapitalised, unemployment is persistent and corrosive and, at 56% of GDP, the French state is the biggest of any euro country." But looking at the data, France actually does not seem to be doing particularly badly. A look at a few basic economic indicators over the past ten years fails to reveal any obvious signs of an economy that has been oppressed by an oversized government sector, as seen below.

Yes, the French have chosen to allow the government to perform more functions than in many other countries, but economic growth has not been notably worse than its neighbors, and its public debt burden is on par with Germany and the United Kingdom. Despite ideological wishes to the contrary, there is little evidence that countries that choose to have a larger government (within a reasonable range) perform worse economically.

Hollande's chief sins are, according to the Economist, that he advocates a very high top income tax rate, that he supports a suspension of a planned increase in the retirement age for those who have contributed the longest to the nation's pension fund, and that he has a generally "anti-business attitude". But it's hard for me to see how any of this could spell doom for the French economy. And on the other side of the ledger, Hollande has something extremely important to recommend him to those who care about European economic performance: a potentially strong voice against the counterproductive austerity madness that has dominated eurozone politics for the past couple of years.

The tide may be turning more widely in the battle for the eurozone's macroeconomic sensibilities; perhaps the steady repetition by certain prominent voices of the simple truth that austerity is counterproductive under current circumstances may finally be bearing some fruit. But if Hollande becomes France's president, the relative weight of the anti-austerity camp will grow considerably in the eurozone. And that can only mean good news for the future of the eurozone.

Won't eurozone bond markets be spooked by Hollande's softness on deficits, though? I doubt it. I tend to think that bond market participants are, on average, quite savvy. And they fully understand (probably quite a bit better than a lot of politicians do) the arguments for why pro-growth policies are the best ways to restore long run fiscal health to eurozone (and other) economies. Instead of causing fiscal armageddon, expansionary fiscal policies could actually reduce national debt burdens in most eurozone countries, given present circumstances.

So rather than be afraid of things like a possible Hollande victory, or the collapse of the conservative, austerity-promoting government of the Netherlands, I actually see such developments as reason for the slightest bit of (cautious) optimism. The eurozone crisis is and always has been primarily a balance of payments crisis, not a fiscal crisis. So if we are finally nearing the end of the disasterous blanket prescription for austerity as the solution to the eurozone's financial market crisis, that can only be a good thing.


  1. The economist's election picks are one of the clearest contrarian indicators out there. Bush. Bush again. Need we say more?

  2. Avante Gard9:18 AM

    It would, of course, be sensible to adopt pro-growth policies, but Hollande seems to just be proposing more of the pro-debt policies that France has used for decades. Debt is not Growth. Debt contributes to GDP now while subtracting from it later. But when real interest rates are positive, it subtracts more than it adds.

    France needs non-debt growth, so that it can re-pay some of the debt it has accumulated over the past few decades. Hollande seems to have no clue how to solve that problem.

  3. Steve LaBonne9:01 AM

    Can you read at all? Are you actually complaining about France's sky- high 2001-11 debt to GDP ratio of 82% vs., say, Germany's low, low 83%?

    Ideology prevents not only thinking, but even basic reading comprehension.

  4. jult528:59 AM

    Germany ran a budget deficit of 1% in 2011 compared to France, which had a 5% deficit.  As we know from Spain, build-ups in corporate and local government debt among other factors can add significantly to national credit problems, so it's worthwhile looking at what the market is saying about the solvency of France and Germany as well so that all problems can be included.  The French sovereign 5-year CDS is now at ~1.9% vs the German CDS of ~0.8%.  A 10% risk of default by France over 5 years (5 x 2%) is not insignificant.

    Not just ideology, but anger prevents thinking.

  5. Anonymous9:31 PM

    My brother recommended I might like this web
    site. He was totally right. This post actually
    made my day. You cann't imagine simply how much time I had spent for this info! Thanks!

    my webpage :: diet that works