Paul Krugman has unearthed another vast right-wing conspiracy. This one doesn’t involve interns in the Oval Office, but rather Standard & Poor’s recent one-notch downgrade of France’s AA+ credit rating.
Krugman, a Keynesian and a fan of government largesse, calls the move a “plot against France.” In a recent column he accuses “fiscal scolds” of “using debt fears to advance an ideological agenda.” In other words, S&P’s concerns about France’s growth prospects are nothing more than “negative propaganda.”
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Krugman may be drinking too much Bordeaux in addition to the Kool-Aid. He notes that France is growing faster that the Netherlands (which has been in recession for several quarters thanks to a sizeable real-estate blowout) and that French workers are more productive than their German counterparts (a questionable conclusion).
He reports that the country’s budget deficit has fallen sharply since 2010 and that the IMF is projecting the ratio of debt to GDP to be “roughly stable’ over the next few years (at an excessive level). He also predicts that the nation’s “remarkable” health care program will be a “big fiscal advantage looking forward.”
That’s the same healthcare system that offers mud baths, free taxi rides to the hospital and other generous benefits- and that is running solidly in the red as bureaucrats frantically try to cut costs.
Here’s what is really taking place in France: 80 new tax increases since Francois Hollande took over as President last May – producing sometimes violent protests across the country and approval ratings for the Socialist leader below 25 percent.
The push-back against Hollande has been so intense that the government has been forced to rescind a number of measures – including one in the past two weeks that would have slapped a 15.5 percent retroactive levy on savings plans. That came on top of an “eco-tax” on trucks that sparked wide-spread demonstrations among Bretons sporting red caps, harking back to protests against Louis XIV’s dreaded 1675 stamp tax. The French have, it turns out, long memories.
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The killer, though, may be that France’s football clubs are threatening to strike over Hollande’s 75 percent super-tax on those making more than one million euros. That’s serious business.
Why is Hollande so tax-happy? Because he faces even greater resistance to spending cuts, and he needs to do something to lower the country’s budget gap. Despite Mr. Krugman’s assurances, France’s fiscal picture is cloudy. The nation’s debt continues to rise, recently hitting an all-time record of 95 percent of GDP, up from 90 percent in 2002. (The median level for countries with a triple-A rating is 49 percent.) A further climb is forecast for next year.
The country has been in recession for the better part of the past year; growth this year will be minimal. The forecast for next year, according to the most recent forecast from Finance Minister Pierre Moscovici is a gain of only 0.9 percent. At the same time, the budget deficit is likely to top 4 percent in the current year and come in at 3.6 percent next year. Both projections have recently been raised as income growth has disappointed.
More significant however, is the long-term decline in France’s competitiveness – an issue raised by the IMF and other financial watchdogs. In 2000, France ran even with Germany in terms of export market share in the EU; since that time, Germany has pulled ahead significantly. Moreover, in the wake of the financial crisis, Italy, Spain and other EU members have loosened labor laws and undertaken other reforms to boost productivity.
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France has lagged in this effort, as the IMF pointed out in its mid-year review. “Structural rigidities in labor and product markets, and comparatively low profit shares, have undermined the economy’s growth potential and contributed to loss of export performance.” As a result, unemployment is over 10 percent.
While productivity is higher in France than Germany-- so is compensation. In fact, France’s unit labor costs (compensation per employee over productivity) are higher than those in Germany, Spain or Italy. It wasn’t always so: in 2005, as Germany’s labor reforms began to take hold, that nation’s unit labor costs fell below those of France for the first time.
It isn’t just about the cost of labor in France. Union-friendly work rules make it difficult to hire and fire workers; in its annual ranking of economic freedom, the Heritage Foundation puts France 62nd. It ranks 30th out of 43 in Europe. “Labor Freedom” is one of its worst scores. France also ranks towards the top of the OECD’s “employment protection index” – more than three times higher than the U.S.
Perhaps most salient in assessing France’s economic health, however, is that public spending is expected to run 57 percent of GDP this year—higher than any other developed country. The government, pressed to narrow its budget deficit, is planning a modest 1.5 billion euro reduction next year—a move called “unprecedented” in postwar France.
This is the real problem for Krugman and for others who decry what they perceive as the rending of safety nets around the world. It turns out that countries (or cities or states) cannot over long periods spend more than they earn – that there is a day of reckoning. It also emerges that countries that have consistently favored workers over business growth have fallen behind. Global competition and the financial crisis have stripped the cupboard bare while exposing the impossible promises made to retirees and to the poor.
The worst result is what we have witnessed in Europe. When times get tough, countries with already-high debt and deficits have no flexibility. This is the lesson of the financial crisis – a lesson Mr. Krugman refuses to acknowledge.
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