January 27, 2015

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Hollande to blame for France’s failing economy

MCT

Europe seems to have come a long way since Mario Draghi, president of the European Central Bank,  promised to do “anything it takes” to save the Euro currency over the past summer. But even with the apparent progress, the economic situation in Europe is still dire. Particularly in France, a country that is coming to the fore in a very dangerous fashion.

Francois Hollande of the Socialist Party defeated the incumbent Nicolas Sarkozy to become the President earlier in May. The new president has made far too many promises that were far too lofty, and thus the future looks bleak for him.

According to “The Economist,” Hollande’s approval rating has tanked like the Dow Jones does on hearing bad news — very quickly. His approval currently lingers below a paltry 50 percent despite holding office for much less than a year.

Possessing experience in neither business nor politics, Hollande seemed, to many French citizens, a fresh face in politics. But he may turn out to be what most observers expected: inexperienced in a country-wide financial meltdown. His policies such as the 75 percent top marginal tax rate, prohibitive taxes on businesses and attempts to force companies like Peugeot and Renault to keep their excess capacity, instead of cutting costs in a bid to be profitable, are doing the country a disservice.

What’s more, the increase in France’s labor costs without commensurate productivity gains, and Hollande’s insistence on decreasing the retirement age has been met with skepticism by economists and with derision by markets. Sadly for him and probably unsurprisingly, his policies have been misguided.

In the grand scheme of things, France is a country that looks disdainfully upon economic liberalism and capitalism in general. Its textbooks disavow the benefits of liberalism and make specious claims regarding the same, feeding children dishonesty right at the school level.

For the French, the allure of statism and ‘dirigiste,’ or directed and planned economic policies are quite strong and it is no surprise that related policies are rearing their ugly heads and currently threatening the financial stability of one of Europe’s foremost countries.

The credit rating agency Standard and Poor cut France’s investment rating from AAA to AA in January 2012. While another agency, Moody slashed the same coveted rating last week.

It is not difficult to see why the ratings were slashed. France has had similar issues for quite some time now. Looking back, France has not balanced a budget since 1974 and public spending accounts for 57 percent of its GDP. In a bid to placate the restive populace, Hollande sought to maintain fiscally irresponsible policies and put in force others that were similarly faulty.

To the northeast lies Sweden, a pragmatic and responsible country. Strangely, it has presented much more growth and economic stability than is warranted for such a large welfare state.

Unlike France, Sweden balances its budget quite often and has a less bloated public sector and is growing exceedingly more robustly than our French friends.

Contrary to what others say, Sweden largely does not resemble an illiberal democracy and its case is buttressed by features such as an efficient tax code that is progressive and encourages people to work. Much to the dismay of avowed leftists, despite these policies, Sweden’s Gini coefficient, a measure of inequality where a lower value is desired, is at a healthy 0.27.

Naturally, one is then tempted to wonder how France can mend its near broken economy and cultivate a healthy mix of fiscal prudence and steady growth.

Recently, Louis Gallois, the Investment Commissioner of France, released a report urging the President to help the French economy regain competitiveness. France, he said, was hamstrung by high labor costs, inefficient taxation and a large public sector, findings corroborated by the International Momentary Fund (IMF), which I concede has had its own share of criticism, which is another story altogether.

If the European media is to be believed, onerous and inefficient regulation legislated and sent down by the European Parliament is heaping prohibitive costs on small French businesses, making life considerably more difficult for such enterprises.

What French industrialists, prominent economists and European politicians are saying, in a nutshell, is that France needs to smartly cut its public sector while maintaining pro-growth policies. France needs to boost trade within the European Union and with other countries in a bid to stabilize its foundering economy.

Although numbers and facts give credence to this argument, one would be remiss to exclude a form of psychology. As mentioned before, France is very statist and has a track record of intervening in the economy in multifarious fashions that are not always entirely helpful. This creates an uncertain business atmosphere which, suffice it to say, is unsound.

The classical liberal economist and philosopher Friedrich Hayek once wrote that a government is most helpful if it is defined by a set of rules that describe a predictable manner in which it can go about its business. Unfortunately, France is quite far away from adhering to that maxim.

I concede that it is one thing to sit behind a desk and postulate what will work in the French economy and what will not work. However, it can be argued that this column deals not with mere armchair ratiocination. Since Hollande’s implemented policies and actions are failing miserably, a change of direction would do wonders for the French economy and the French people.

 

Nikhil Rao is a Collegian columnist; he can be reached at nrao@student.umass.edu.

Comments
3 Responses to “Hollande to blame for France’s failing economy”
  1. Brian D. says:

    Ummm… Sweden is WAY more statist (or “socialist”, if you want to call it that) than France. The Swedish welfare state is bigger, public spending on health care and education is higher, unemployment benefits are higher, and so on. Public spending accounts for almost exactly the same percentage of GDP in Sweden and in France:
    https://www.cia.gov/library/publications/the-world-factbook/rankorder/2221rank.html?countryName=France&countryCode=fr&regionCode=eur&rank=14#fr
    .
    So, actually, the fact that Sweden is doing perfectly fine while France is not, shows that it is possible to have an extensive public sector and a statist or interventionist government policy and still keep a balanced budget and a booming economy.
    .
    And what is Sweden’s secret? High taxes. It really is that simple. The government spends a lot of money, and gets that money through high taxes. This means it doesn’t need to borrow, which means it can keep a balanced budget, which means it does not have any financial problems.

  2. David Hunt '90 says:

    Sweden also spends squat on defense compared to its size and population, covered for decades by the US military’s umbrella.

  3. Brian D. says:

    Actually, Sweden maintains a policy of armed neutrality and has not been involved in any war since 1814. It is not a member of any military alliance and does not have any military protection agreements with anyone. It was never a US ally, and it remained neutral during the Cold War.

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