France deathwatch

There is a good bit of anticipatory gloating and schadenfreude about France in conservative Anglo-Saxon circles

We enjoy the spectacle of the French people electing a socialist government in the midst of a sovereign debt credit crisis. We are excited by the new government’s array of taxes which will throttle any prospect of animal spirits in that lovely country. We are amused by the government’s new law against plant closings. We await impatiently the inevitable “missed” fiscal targets, the “unexpected” decline in revenue and the “unexpected” rise in spending. We gnash our teeth at the bond market’s dereliction, refusing to rise up and do to France what it is doing to Italy and Spain. But we know, in our heart of hearts, that France is going down.

No one wants to see Hollande fail more than I do. But I have to be honest: it isn’t really his fault. Yes, of course raising taxes and cutting spending may help to keep the bond market happy, but it will not succeed; France is going down.

Thanks to the wonderful folks at the St. Louis Fed, we can readily access French financial and economic data in God’s own language. The picture isn’t pretty. Yes, debt/GDP is headed in the wrong direction, and yes, the public sector is gigantic. But that’s not the problem. The problem is nominal growth (real growth plus inflation). Nominal money is the currency in which the world does business; “real” money isn’t real.

France’s nominal GDP growth is dangerously inadequate. Having fallen to -4% during the crisis, it crawled back to 2% and is now falling once again. Right now it’s at 1.5%, and falling. No country can prosper and maintain fiscal balance without better growth than that. Since EMU, NGDP growth has ranged from 3% to -4%, with an average that is way too low.

NGDP growth of 1.5% necessarily limits government revenue growth to ~1.5%, and it is not possible to run a socialist economy on that level of growth. Yes, Northern Europe has done so. But Northern Europe has already reformed itself, and shed an awful lot of socialist dead weight in the process.

The World’s Opinion Page

Help support Project Syndicate’s mission

subscribe now

France has not reformed itself, and just voted for more left-wing utopianism. To live in a world of very low nominal growth requires heroic budget discipline and flat real wage growth. It requires docile labor unions and public-sector layoffs. It requires an efficient private sector that can restructure itself to compete despite a strong currency. That France doesn’t have.

France needs at least 4% if not 5% NGDP growth to start digging out of its hole. Hollande could usher in his socialist paradise if he had that kind of growth. But he’s not going to get it, the way things are headed. France is going down, but he is too dumb to know it. (Has he ever bothered to read an American economics textbook?)

France needs inflation now. There are only two ways to get it: eurozone exit or a change in the ECB’s mandate. France is not going to leave the eurozone prior to its default, which leaves the ECB charter. The problem there is that the charter treaty can’t be changed without a unanimous vote of the 17 eurozone members, and the North isn’t buying it.

That means that France faces a future of anemic growth, continuing fiscal deficits, rising debt ratios, riots (of course) and, at some point, a bond market revolt. The ECB will do everything it can to prevent a sharp rise in French bond yields, but it is limited by its “no fiscal monetization” charter. That is why I expect France to go down, probably at the end of next year, when the fiscal targets are “missed”.

http://prosyn.org/jYStk8G;
  1. Television sets showing a news report on Xi Jinping's speech Anthony Wallace/Getty Images

    Empowering China’s New Miracle Workers

    China’s success in the next five years will depend largely on how well the government manages the tensions underlying its complex agenda. In particular, China’s leaders will need to balance a muscular Communist Party, setting standards and protecting the public interest, with an empowered market, driving the economy into the future.

  2. United States Supreme Court Hisham Ibrahim/Getty Images

    The Sovereignty that Really Matters

    The preference of some countries to isolate themselves within their borders is anachronistic and self-defeating, but it would be a serious mistake for others, fearing contagion, to respond by imposing strict isolation. Even in states that have succumbed to reductionist discourses, much of the population has not.

  3.  The price of Euro and US dollars Daniel Leal Olivas/Getty Images

    Resurrecting Creditor Adjustment

    When the Bretton Woods Agreement was hashed out in 1944, it was agreed that countries with current-account deficits should be able to limit temporarily purchases of goods from countries running surpluses. In the ensuing 73 years, the so-called "scarce-currency clause" has been largely forgotten; but it may be time to bring it back.

  4. Leaders of the Russian Revolution in Red Square Keystone France/Getty Images

    Trump’s Republican Collaborators

    Republican leaders have a choice: they can either continue to collaborate with President Donald Trump, thereby courting disaster, or they can renounce him, finally putting their country’s democracy ahead of loyalty to their party tribe. They are hardly the first politicians to face such a decision.

  5. Angela Merkel, Theresa May and Emmanuel Macron John Thys/Getty Images

    How Money Could Unblock the Brexit Talks

    With talks on the UK's withdrawal from the EU stalled, negotiators should shift to the temporary “transition” Prime Minister Theresa May officially requested last month. Above all, the negotiators should focus immediately on the British budget contributions that will be required to make an orderly transition possible.

  6. Ksenia Sobchak Mladlen Antonov/Getty Images

    Is Vladimir Putin Losing His Grip?

    In recent decades, as President Vladimir Putin has entrenched his authority, Russia has seemed to be moving backward socially and economically. But while the Kremlin knows that it must reverse this trajectory, genuine reform would be incompatible with the kleptocratic character of Putin’s regime.

  7. Right-wing parties hold conference Thomas Lohnes/Getty Images

    Rage Against the Elites

    • With the advantage of hindsight, four recent books bring to bear diverse perspectives on the West’s current populist moment. 
    • Taken together, they help us to understand what that moment is and how it arrived, while reminding us that history is contingent, not inevitable


    Global Bookmark

    Distinguished thinkers review the world’s most important new books on politics, economics, and international affairs.

  8. Treasury Secretary Steven Mnuchin Bill Clark/Getty Images

    Don’t Bank on Bankruptcy for Banks

    As a part of their efforts to roll back the 2010 Dodd-Frank Act, congressional Republicans have approved a measure that would have courts, rather than regulators, oversee megabank bankruptcies. It is now up to the Trump administration to decide if it wants to set the stage for a repeat of the Lehman Brothers collapse in 2008.