France – Growing Despair, Clueless Politicians

No Future

President Hollande's three musketeers, from left to right: Pierre Moscovici, the would-be reformer, Jean-Marc Ayrault the procrastinator, and Arnaud Montebourg, the knight-tilting-against-the-windmills-of-globalism

By Pater Tenebrarum

Young people have it very difficult in France. Many have no future, as youth unemployment has soared to 26%. German news magazine Der Spiegel gets it right when it fingers the culprit as follows:

“Youth unemployment in France has been high for some time, but it has now climbed to 26 percent. For decades, regardless of their political affiliation, lawmakers have been promising to create a better situation for young people. But exactly the opposite has happened. Labor laws protect those who already enjoy steady jobs, while the economic crisis and recession have limited the number of new jobs created. Meanwhile, housing has become both scarcer and pricier.

"Something must finally be done," says Didier Dugast, director of the Mission locale in Moissy, who reports that the number of those seeking his assistance has been jumping by some 10 percent each year.

A new program from Socialist President François Hollande for the creation of "future jobs" has been in effect since November. It targets people much like Affram [an unemployed youth whose fate the article discusses, ed]. But he just shrugs his shoulders and says: "We're used to politicians constantly coming up with new ideas." (emphasis added)

Of course we cannot expect Mr. Hollande to abandon the sacred 'code du travail'. The unions would be up in arms over it. It goes against the grain of socialist ideology to abandon these laws that are allegedly 'protecting' workers.  Of course they do protect someone, namely those already ensconced in a job. However, even this protection is an illusion. As the economy spirals into the abyss, the code will protect none of those employed by firms that go bankrupt. Once they join the ranks of the unemployed, they will find out that the 'code' has quietly priced them out of the market. Politicians are coming up with 'new ideas', but none of them work, because they all attempt to skirt the laws of economics by pretending that somehow, the problem of institutional unemployment can be solved while the very causes of it are left in place unaltered.

Convocation of the Clueless

What is so sad is that the French, eager to get rid of the ineffectual former president Sarkozy, have elected a bunch of utterly clueless men who think the State is the solution to every problem. Many are indeed people that have 'lost touch with reality', as Der Spiegel mentions in another article. The 'clock has been turned back by 30 years', as some businessmen complain. Properly taking aim at the minister for industrial insanity, Der Spiegel writes: 

“Arnaud Montebourg, the French minister of industrial renewal, carries his head high. In his mind, politics is a combat sport. A shiny, decorative sword hangs on the wall behind him in his office on the third floor of the enormous Ministry of the Economy, Finances and Industry in Paris. The 50-year-old combative politician tends to rush headlong into battle, but he is often left with no choice but to carry out the maneuver he despises the most: retreat.

That was the case last weekend, after Montebourg had become locked in a spectacular wrestling match with the steel giant ArcelorMittal, which employs 20,000 people at 150 sites in France. In Florange, north of the city of Metz, which sits near the borders with Germany and Luxembourg, the company planned to permanently shut down two blast furnaces and lay off 630 workers.

The industrial site, in the economically depressed Lorraine region, has long been unprofitable, and ArcelorMittal suffers from overcapacity. The plant closing probably wouldn't have attracted much attention, but Montebourg, who sees the preservation of industrial jobs as his primary goal, needed a success — and forgot the principle of proportionality.

Instead, he brought out the biggest gun in the Socialist government's arsenal, and threatened the company with the temporary nationalization of the Florange site, and declared its main shareholder and CEO, Indian steel magnate Lakshmi Mittal, to be a persona non grata because he doesn't respect France. Mittal was shocked and requested a meeting with French President François Hollande. Prime Minister Jean-Marc Ayrault was forced to recognize that Montebourg had set a fuse which, if lit, could cause the government to explode. (emphasis added)

From this it seems that Montebourg's excursion into the realm of blackmail didn't go down too well. However, as we pointed out at the time, it is the signal it sends that is so damaging. If companies can no longer dispose of their assets as they see fit, then there is no reason for them to invest and take risks. It is a dangerous game Montebourg is playing.

But even as some in France are shocked at his antics, it turns out that he is actually playing to a gallery that wholly approves of his approach and that increasingly believes that only the State can secure its future – without stopping to ask where the State will get the resources to do so.  

“Has the government forgotten that nationalization means expropriation?" asked Laurence Parisot, the appalled head of MEDEF, the employers' union.

The liberal economist Nicolas Baverez, who predicted "France's downfall" 10 years ago and has just written a book titled "Réveillez-Vous" ("Wake Up"), saw the wrangling over Florange as proof that the French left still hasn't accepted globalization, and acts as if the country were an economic and cultural preserve. "The idea of nationalization sends an ominous message to all investors," Baverez said.

Even Finance Minister Pierre Moscovici carefully distanced himself from Montebourg, saying: "Our policy differs from the past experiences of leftists in power."

But the workers at the Florange site and their unions were thrilled with Montebourg's threat. According to a snap poll, a majority of the French people and, in particular, leftist voters, appreciate such showdowns with the patrons, or business owners. It's no accident that France's young people see working in the public sector as the ideal professional career. The government promises protection and security. (emphasis added)

Now, in theory it would be possible to replace the market economy entirely with a command economy, which then would presumably provide perfect protection and security for everyone. But it would be the security enjoyed by slaves, and its 'perfection' would be a short-lived illusion, as there would no longer be a rational economy able to allocate resources to their most urgent employments. Sooner or later it would fall apart, the division of labor would break up, and people would begin to live a hand-to-mouth existence, barely above subsistence levels. Presumably that is not what those who are cheering Montebourg on have in mind, but it is what the ideology they support inescapably leads to. This is not just an ideologically colored argument either – rather, it is a scientific fact. A socialist economy cannot calculate, and hence a socialist economy is a contradiction in terms: it can no longer be called an 'economy' in the traditional sense. 

A Growing Danger

In a sense France is already halfway there. Public spending amounts to a full 57% of the country's GDP, and 9% of the population (not just the work force, the entire population; 22% of the total work force) is employed in the public service. This is a voting bloc that has become extremely powerful and resists change at every turn. Given how combative and prone to public protest the French are (as Der Spiegel reminds us, French unions don't go on strike when negotiations with employers fail, they go on strike before they even begin), one wonders what will happen once the loot runs out – as it inevitably must. 

“The country's industrial sector has lost 2 million jobs since the Mitterand era. In 2011, France had a trade deficit of €71.2 billion ($93.1 billion), compared with a surplus of €3.5 billion in 2002. At the same time, the national debt has grown to 90 percent of the gross domestic product.

"Whenever a new problem popped up in the last 25 years, our country reacted by increasing spending," says banker Michel Pébereau.

Public sector spending now accounts for almost 57 percent of GDP, more than in Sweden or Germany. For every 1,000 residents, there are 90 public servants (compared with only about 50 in Germany). The public sector employs 22 percent of all workers. La douce France is a sleepy country of bureaucrats and government officials who want their peace and quiet.” (emphasis added)

Alas, peace and quiet will be more difficult to come by if the economic downward spiral is not arrested. Some credit is given by 'Der Spiegel' to those in the French government who seem to be aware of the problem and are voicing the need for change, but as is so often the case, it all seems too little,  too late. Too timid are the reforms, as a result of the government's eagerness to avoid confrontation. Quietly this creates an ever bigger danger for the euro area as a whole: 

“Montebourg's agitation can be partially explained by the fact that since the Socialists came to power, the country has added another 150,000 unemployed, bringing the national unemployment rate to 10.7 percent. Some 45,000 people were added to the unemployment rolls in October alone. Instead of straightening up industry, Montebourg is preoccupied with fighting redundancy programs.

Only now has the government brought itself to grant companies €20 billion in tax relief to reduce labor costs. But it was a somewhat half-hearted step. Gallois considered €30 to €50 billion necessary. Last week, the government was confronted with another disastrous report, this time on the situation facing France's young people, who have been especially hard-hit by poverty and unemployment.

Sociologist Olivier Galland, who headed the study, detects a feeling of bitterness and abandonment among 16- to 25-year-olds. "All of the elements are in place that could trigger yet another explosion," like the one in the late fall of 2005, when there was rioting in the outskirts of major French cities.

"The system won't survive if we don't change," says Gérard Dussillol, a French expert on finance who works for a Franco-Belgian think-tank. He believes that "France, as a domino, can shake the entire system of the euro zone." (emphasis added)

As dominoes go, this is the ultimate one, as France is part of the so-called 'core' on which the entire euro project now depends. In November of 2011, Italy and Spain made headlines as their bond market yields exploded beyond the 7% level and credit default swaps on their debt soared above the 600 basis points level.

However, it was also the one moment in the crisis when France was beginning to come under a cloud of suspicion as well. In particular, the market began to worry about the vast exposure of French banks to the 'PIIGS' and their dependency on short term dollar funding from US money market funds. These funds got cold feet at the time, as they were sporting huge exposure to French banks which they felt compelled to quickly cut back.

The market worried that the French government would have to eventually step in to save the biggest banks, as had happened with Franco-Belgian bank DEXIA – a bank that had gone from being deemed in perfect health to insolvency in a matter of months. The cost of such a bailout exercise could have been exorbitant.

These worries have for now taken a backseat due to the ECB's LTROs and the renewal of currency swaps between various central banks (which by the way have been renewed again only last week). However, the underlying fundamental economic situation has markedly deteriorated ever since, so the calm may prove to be deceptive.

Perhaps the realists in France's government (apparently led by finance minister Moscovici) will still carry the day. They shouldn't wait around too long however. Mr. Hollande from all accounts appears to be aware that reform is needed, but is reluctant to implement it too quickly or in 'too large doses', for fear of angering his political support base. This could create a big problem. It will be far more difficult to successfully introduce reform when the point of crisis has already been reached.