Fiscal tinkering and dismal economic news appear to have a long life ahead in France
by Fabio
Rafael Fiallo
To search for
efficacy and coherence in the economic policy conducted by France's President
Francois Hollande and Prime Minister Jean-Marc Ayrault has become an arduous if
not fruitless task. Welcome to 21st century France, where daily headlines
detailing dismal employment numbers, factory closures and redundancy plans are
edged out only by cases of government muddling and backpedaling.
President
Hollande's woes stem, to a large extent, from the difficulty in reconciling his
commitment to reduce by 2015 the public deficit to three percent of GDP with
the pressure exerted by his political base to maintain France's profligate
welfare state -- and an overall public spending that absorbs 57 percent of GDP
(the highest ratio, along with Denmark, in the Eurozone).
Constrained by
these political parameters, President Hollande and his prime minister have
tried to shave France's public deficit by lavishly raising taxes and creating
all kinds of new levies.
But then,
confronted with the massive discontent that such measures have provoked among
firms, farmers and households, the government has been obliged to backpedal and
even capitulate on multiple occasions.
President Hollande
recently gave the impression that he understood the malaise France is stuck in
when, in August of this year, he announced a "fiscal pause" (a
standstill on taxes) for 2014. In September, he went further and promised that
there would be "no more tax increases" apart from those already in the
pipeline.
The commitment
proved to be short-lived. Prime Minister Jean-Marc Ayrault corrected the
president by stating that, in fact, the "fiscal pause" would have to
wait until 2015. What's more, a new tax hike -- retroactive to 1997 -- was
imposed on household savings, while a pro-environment levy on road
transportation (ecotax) was programed to be collected as of January 1, 2014.
These new measures
gave rise to large-scale protests that forced the government to backpedal in
both cases.
The cocktail of tax
increases and policy climbdowns has brought about an environment characterized
by fiscal instability and economic uncertainty. Not surprisingly, firms are
reluctant to invest and hire as they fret the arrival at any moment of a new
fiscal blow that would damage their profitability.
Reflecting the
current funk among entrepreneurs, a survey commissioned by the American Chamber
of Commerce in France, released last October, indicates that only 13 percent of
U.S. firms operating in France have a positive perception of France's economic
outlook, down from 56 percent in 2011. Likewise, France fell from 34th to 38th
place in the latest World Bank ranking of the most attractive countries in
which to do business.
For sure, the
predicament of the French economy antedates Francois Hollande's tenure. Yet,
the current tax spree and the ensuing policy insecurity have made things worse.
This explains why Standard & Poor's has just downgraded France's government
debt (the second time in less than two years) on the grounds that the country's
fiscal flexibility is "constrained by successive governments' moves to
increase already high tax levels, and what we see as the government's inability
to significantly reduce total government spending."
Playing the
contrarian, Nobel laureate and New York Times columnist Paul
Krugman recently came to the defense of Francois
Hollande's economic policy by asserting that the S&P's downgrading was
"much more about ideology than about defensible economic analysis."
French
authorities, however, would be well advised not to place their bets on his
support. Indeed, Mr. Krugman's policy judgment on European economies has been
far from infallible, as documented in a recent articlepublished by
Anders Aslund of the Peterson Institute for International Economics.
No less
disquieting, in May 2012 Krugman endorsed the view that Argentina was a
"remarkable success story" and derided articles presenting a
"negative" image of that country -- much in the manner that he now
scorns S&P's downgrading of France's sovereign debt. To judge from the
contradiction between Krugman's praise and the present disarray of the
Argentinian economy, French policy makers should have reason to worry, rather
than rejoice, about his support.
Be that as it may,
France's fiscal zigzag is not only penalizing firms' investment and hiring, it
is also encouraging social revolt. A confidential note recently
prepared by the country's prefects (i.e. the high-ranking civil servants who
represent the state at the regional level) expressed concern over the specter
of "fiscal disobedience" nationwide.
Socialist MPs and
local leaders, and even government members, try publicly to distance themselves
from the tax hikes -- if only to preserve their chances to win or keep a seat
in forthcoming elections.
With Hollande
beating records of unpopularity (his approval rating is at 21 percent, the
lowest ever for an elected president in France), many in his camp are pressing
him to disregard the objective of reducing the public deficit and utilize
instead the public spending lever.
The problem is
that financial markets would not fail in such a case to raise the interest
rates charged on French government bonds. This, in turn, would oblige the
government to either increase taxes further or cut public spending, or both.
Back, in other words, to square one.
A more sound
option for President Hollande would be to emulate former German Chancellor
Gerhard Schroeder, a Social Democrat like him, who introduced structural,
supply-side reforms (labor-market liberalization, public spending cuts and tax
reductions) that led to the restoration of Germany's competitiveness and to an
improvement of that country's public accounts.
This course of
action, however, poses major problems for Hollande. Schroeder and his party,
the SPD, lost the national elections held after the introduction of those
reforms; and Hollande, who is to seek reelection in 2017, would abhor enduring
a similar setback. Moreover, it is far from certain that large segments of
Hollande's party, and of France's Left in general, would endorse such a policy
U-turn.
For all these
reasons, prevarication, fiscal tinkering and dismal economic news appear to
have a long life ahead in France.
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