The platform I use for this blog gives my
‘pageviews by country’. One surprise is that, using this criteria, the country
which comes third in the list, after the US and UK respectively, is France.
(Over the last month, for example, about 12,000 pageviews compared to about
36,000 in the UK and around double that in the US, with a whole group of
countries below France at around 5,000.) This is really nice, particularly as I
have only once written a post specifically about France, over a year
and a half ago.
So a recent post by Ronald Janssen in the Social Europe
Journal allows me to make up for that. First some background if you do not live
there. France is subject to the Fiscal Compact’s 3% budget deficit target like
everyone else in the Eurozone. European
Commissioner Olli Rehn is the chief enforcer of these rules. In May the
Commission granted
France, along with a few other countries, 2 years grace before they needed to
achieve that target. The Netherlands was given only one year, with consequences
I talked about most recently here.
The chart below shows OECD numbers and forecasts for various
fiscal measures in France. The financial balance relates to the 3% target. The
underlying balance essentially cyclically adjusts this. As you can see, the key
reason that France is not meeting the 3% target is depressed output. The OECD
estimates the output gap in 2013 will be nearly -4%, rising in magnitude to
-4.5% in 2014. The underlying primary balance is the best indicator of what
government policy is doing: fiscal policy has been tightening ever since a
sharp expansion following the 2008/9 recession.
So far, so typical of the Eurozone and elsewhere. However what
makes France relatively unusual is the pattern of this tightening. As the IMF
clearly showed in analysis I discussed here, it has achieved this fiscal contraction
entirely through tax increases rather than spending cuts. The first best thing
to do, of course, is to delay fiscal tightening until the output gap has
closed. The Eurozone’s fiscal rules will not allow that, and instead in the
current context encourage pro-cyclical fiscal policy. I have never met a
macroeconomist who advocated pro-cyclical fiscal policy, but of course those
behind the Fiscal Compact know best.
If you have to follow the Fiscal Compact, then I have always argued from the point of view of doing least
damage to the economy in a recession any temporary fiscal tightening should
focus more on tax increases than spending cuts. You might, for example, try to
meet the Fiscal Compact rules in the short term through temporary tax hikes,
and follow with more permanent spending cuts and/or tax increases once the
economy recovers. To a first approximation that appears to be what the left
wing government in France is trying to do (most notoriously by temporary increases in the top
tax rate).
My argument has always been based on straightforward
macroeconomic theory, but as Ronald Janssen points out in his post, this is fully supported by recent IMF
empirical work. It is therefore entirely predictable that European Commissioner
Olli Rehn should take completely the opposite point of view. He is quoted
as saying that new taxes would “destroy growth and handicap the creation of
jobs." “Budgetary discipline must come from a reduction in public spending
and not from new taxes,” he added.
Now I'm not sure whether that counts as advice or instruction: within the Eurozone it is increasingly difficult to tell. I suppose you could argue that Rehn’s concern is more about the longer term
size of the French state, and that his obvious belief that the French state is
too big comes purely from worries about the implications for macroeconomic
performance. But what struck me was simply this. In the election of April 2012
the French people elected a left wing government that had a clear platform of
achieving fiscal consolidation partly through tax increases. Even if the
Commissioner thinks that is a foolish thing to do, that is their choice.
It is one thing to have a set of fiscal rules that focus on
overall budget deficits: however misguided those rules may be, the French
government did agree to them. What I do not think any Eurozone government
signed up to was having the Commission tell them what the size of their own
state should be. With these remarks, together with its insistence that various
Eurozone countries undertake certain ‘reforms’, the Commission appears to be
doing its best to create a de facto fiscal union. The only problem, of course,
is that the French did not elect Olli Rehn.
