Another shoe falls in Europe. Note the references to similar events in early 1930’s Europe which just happen to lead to the rise of a certain German promising to lead them back to prosperity. It’s a bit of a dry and cumbersome read, but important.
The French Depression
By Ambrose Evans-Pritchard of the UK Telegraph
His tragically-misguided budget offers no strategic plan to reverse — or even to stop — thirty years of slow national decline. He offers no worthwhile measures to slim the Leviathan state, now a Nordic-sized 55% of GDP (Gross Domestic Product), without Nordic labour flexibility or Nordic free markets.
He does not tell us how he will stem the slide in France’s share of eurozone exports over the last decade, down from 17% to 13%, or what he will do about the disastrous swing in France’s trade balance from a surplus of 2.5% of GDP to a deficit of 2.4% since 1999.
He proposes nothing credible to restore France’s viability within EMU (Economic and Monetary Union), or to stop public debt spiralling beyond 90% of GDP. Instead he has served up the most drastic retrenchment in forty years, at the worst possible time, and in the worst possible way. And markets are supposed to applaud?
Mr Hollande likes to quote Leon Blum, the Popular Front leader of the interwar years. The reality could hardly be more cruel. He is replicating the disastrous deflation policies of Labour Chancellor Philip Snowden in 1931, before the Labour Party woke up to the delicious possibility that you could lift two fingers to the forces of reaction and leave the Gold Standard.
Worse yet, he is perilously close to re-enacting the desperate deflation decrees of Pierre Laval — an ex-Socialist dreamer, pacifist, and utopian who lost his way, and ultimately cleaved too closely to foreign ideologies — and like Laval he is doing so to uphold a fixed exchange system that is slowly asphyxiating his country and no longer makes any sense.
His budget is pro-cylical error of the first order, carried out to meet an EU (European Union) deficit target of 3% of GDP that has no economic logic and is plucked out of thin air to meet bureaucratic tidiness and enshrined like so much other idiocy into EU treaty law. The certain result will be hundreds of thousands of lost jobs.
“To save the dogma of single currency, they are imposing absurd hyper-austerity on France,” said Marine Le Pen from the National Front, France’s unlikely apostle of Keynesian doctrine.
France now joins Italy, Spain, Portugal, Greece, Ireland, and parts of Eastern Europe in synchronized tightening, with the Netherlands and Belgium cutting too, all dragging each other down in a 1930s style slide into the political swamp.
Mr Hollande has not been entirely passive. He threw his weight behind the Latin revolt earlier this summer, forcing German Chancellor Angela Merkel to sanction mass bond purchases by the European Central Bank. This would not have been possible in the Merkozy era, when Nicholas Sarkozy sacrificed all else on the altar of the Franco-German unity.
But he has not followed through and there were in any case two quid pro quos to this deal with Germany. One was that Spain and Italy must submit to Troika Hell before the ECB (European Central Bank) buys a single bond. The second was that France must submit to fiscal Hell.
Mr Hollande has his own motives for bowing to austerity demands. He learned the lesson as an aide to François Mitterrand that you cannot deviate too far from Germany if you share a currency peg. There will be no repetition of 1983, the epic U-turn or `tournant de la rigueur’.
He may judge it tactically clever to get his recession out-of-the-way early in the electoral cycle. If so, it is a very risky strategy.
Professor Jacques Sapir, director of the École des hautes études en sciences sociales in Paris, says the more likely outcome is a downward economic spiral, pushing the declared numbers of jobless from 3m towards 4m — and the real number to 6m — by the end of next year. The economy will not spring back of its own accord this time because the contractionary structure of EMU has jammed the mechanism.
Prof Sapir fears global markets will turn on France with “full fury” before long, at which point, events will slip entirely beyond political control. “François Hollande is making a dangerous bet that he can only lose,” he said.
The French economy has already been in quasi-slump for five quarters. Dominique Barbet from BNP Paribas says the latest crash in the manufacturing PMI (Purchasing Managers Index) to 42.6 — the lowest since April 2009, and lower that at any time in the dotcom bust — is “potentially alarming”.
Indeed it is. Data collected by Simon Ward at Henderson Global Investors shows that a key leading indicator of the money supply –`six-month real M1 money’ — is now contracting even faster in France than in Spain. The shock will hit over the winter. “The budget looks increasingly misguided and self-defeating,” he said.
Mr Hollande thinks his budget will safeguard jobs. The fiscal burden will fall on the rich with a top tax rate of 75%, and on industry. Barclays Capital says three-quarters of the total will come by raising revenue, with the taxes “front-loaded” while spending cuts are “back-loaded”. The ratio of taxes to gross wages will rise to an all-time high of 46.3%. (Finance ministry estimates). [ Notice that like in the U.S., tax hikes always come first with hollow promises of mythical spending cuts later, that, of course, never materialize.]
Harvard Professor Alberto Alesina says this flies in the face of all we have learned about austerity. “The accumulated evidence from over 40 years across the OECD ( Organization for Economic Co-operation and Development) peaks loud and clear: spending cuts are less recessionary than tax increases,” he said.
France, above all, screams out for a blast of tax-cutting Thatcherism and pension reform. The IMF (International Monetary Fund) says the country’s “tax wedge” – or tax as a share of labour costs – is one of highest in the world at almost 50%.
Just 39.7% of those aged 55 to 64 are in work, compared with 56.7% in the UK and 57.7% in Germany. Early retirement incentives are to blame. “French workers spend the longest time in retirement among advanced countries,” says the Fund.
France coasted through the last decade, losing 20% unit labour cost competitiveness against Germany as it screwed down wages and pushed through the Hartz IV reforms. French industry has been losing 60,000 jobs a year for a decade. Manufacturing has shrunk to 12% of GDP, as bad as Britain.
Renault chief Carlos Ghosn warned last week that France’s biggest car company would “cease to exist” in its current form unless there was a radical change in the country’s work climate. “Not over three or six months perhaps, but over three years, or five years, yes, the danger is real,” he said.
The whole economic structure of France is an anachronism in a Chinese world and a German currency union. “We are consuming the leftovers of a past prosperity,” says Jean Peyrelevade, ex-head of Credit Lyonnais.
Sovereign debt strategist Nicholas Spiro says growing doubts about the “credibility of French fiscal and economic policy” may soon bring Mr Hollande’s strange honeymoon to a close. It is a widely-shared view. Danske Bank’s bond team sees a “significant risk that the market will turn on France in 2013”.
Huw Pill from Goldman Sachs said the detonator may be activation of the European Stability Mechanism to bail out Spain and then Italy.
The potential ESM demands are too large for the “vulnerable core” of France, Belgium, and Austria. Their own fiscal health would come under the microscope. The shock would push them “from one equilibrium to another.”
Mr Hollande has swallowed the argument that drastic cuts are the only way to cap debt at 90% of GDP and keep the debt trajectory under control.
Yet we already know from Greece, Ireland, Portugal, and Spain that fiscal shock therapy makes little dent on the deficit without monetary shock absorber. It causes nominal GDP and the tax base to shrink, making debt ratios even worse.
France does not have to put up with destructive 1930s policies imposed by Germany. It is not a vassal state. It remains a great nation, the beating heart of Europe and the EU’s balancing force.
It can break out of this awful trap by leading a yet more determined Latin revolt, this time marshalling its voting majority in the Council to force an end to contractionary policies.
A French-led growth bloc can strike back by inflicting an intolerable level of inflation on Germany. It can, if necessary, cause the North Europeans to walk out of EMU altogether — the optimal solution for the North and South respectively.
For that, Mr Hollande must be willing to abandon the Franco-German condominium, the central tenet of French foreign policy for almost sixty years. The cautious, plodding Enarque from the Limousin is not the type for fireworks, but give him time.