My tentative conclusion is that the French economy is not about to
collapse, rather, it is starting a multi-year process of slow decay until it
reaches a moment of truth which could be five to ten years in the future. Although I am not expecting an impending
crisis, I think that we should pay close attention, for as Mark Twain once said, history may
not repeat itself but it does rhyme.
For the American tourist roaming the country and its capital, it is
quite obvious that France is a very rich country. In particular, its physical infrastructure is
very impressive, and it is evident that much money has been invested there. The above mentioned TGV now serves most large
cities, is very comfortable and runs on time; the Air France terminal 2 at
Roissy Charles de Gaulle is airy, its shopping gallery is magnificent and its
bathrooms would make any New Yorker familiar with the old Pan Am terminal cry; the RER (equivalent to our Metro North in New
York) is likewise fast, efficient and well designed; finally, parkways are
devoid of the craters, ridges and potholes that we regularly but unsuccessfully
try to dodge on a daily basis.
To the economist, it is also clear that French households have less
debt and more savings than us and that the country has many assets that could
be sold to very willing foreign investors, witness the sales this year of
Gevrey-Chambertin and Vosne-Romanée
vineyards to Chinese investors. Other
assets are more intangible, such as leading technologies and a global outreach
that goes back centuries. Yes, France is
a very rich country.
The problem is that the world has been changing faster than France;
worse, France has moved in the opposite direction. Historically, the wealth of France has been
built on its large domestic market and later on importing riches from its colonies. Today, in order to maintain its standard of
living France must export more and compete with imports from foreign
producers. Yet, instead of strengthening
its private sector, it protects a bloated public sector which accounts for well
over half of its GDP.
As I wrote in previous notes, French governments have had little
understanding of, or use for, the markets.
So long is the tradition of government intervention, from Colbert’s
reforms to de Gaulle’s Five Year Plans to Mitterand’s nationalizations, that
they believe that markets are either easily willed to toe the official line or
to be held in high distrust. This was
evident even under President Sarkozy and crystal-clear under President Hollande.
Since he took office, President Hollande has studiously complied
with promises he made during his election campaign, such as lowering retirement
age, raising the minimum salary, raising taxes on the rich, lowering gasoline
prices and hiring more teachers. It is
good to keep one’s promises, but even if they are detrimental to the future
of the country? His supporters will
argue that the pension adjustment covered only a fraction of the retiring
population (true), that the raise in minimum salary and the drop in gasoline prices
were small (also true). But the problem is that the opposite decisions were called for, such as progressively
raising the retirement age, lowering effective labor costs and leaving gasoline
prices for the markets to settle.
The proposed tax increases on the rich included elements of utter farce: taxing individual revenues in excess of 1
million euros at a 75% rate but excluding artists and professional athletes
from that; including stocks and ownership in one’s business for purposes of
levying taxes on net worth but excluding works of art. As one commentator noted, it is as if the
government wanted an elite of soccer players and collectors of Louis XIV
dressers. The government now says that
it will introduce these taxes “intelligently”; this reminds me of the French minister
who told a New York audience in 2000 that the 35 hour week law had plenty of
leeway to defang it.
The point is that the current government seems unaware of the
gravity of the financial and economic problems that France faces, yet comforted
by the wealth of the country; accordingly, it seems to believe that gentle
policy adjustments are sufficient, that so long as private companies make a
profit their taxes can be raised, and that high revenues and corporate profits
are evidence of profound social injustice.
Essentially, France like most countries is bound by its culture,
and as we all know, national cultures change little and only over extensive
period of time (witness A. de Tocqueville and A. de Custine’s enduring relevance
to the US and Russia respectively). I
don’t think that the Hollande government can or wants to significantly correct
its initial choices and orientation, nor that the French people want it to. I think that even if a flash crisis strikes Greece,
Spain or Italy, France will not budge appreciably and that fundamental reforms a la Schroeder will have to
wait until 2016 at the earliest.
Why should we care? Because
history rhymes. What we are witnessing
in France reminds me of what has happened to another very rich and
sophisticated country, Argentina.
Despite occasional bouts of recovery, Argentina has not returned to its economic
glory days of the 30s and 40s. This last
decade, this country has successfully “picked the pockets” of its foreign
creditors, its retirees and companies operating on its territory to fund its
populist policies; price controls have distorted its energy sector, crime is
rampant, inflation is well into double digits and now foreign exchange controls
are used as a last attempt to stem capital flight. Many Porteños say
that Buenos Aires is the Paris of South America; that is true, and more than
they know.
I am not saying that France will end up where Argentina is today, what
I am saying is that there are enough cultural and other similarities for France
to watch out and try to get off the Argentine-like track on which it is now engaged.
The US are different from France culturally, historically and
geographically. It is unlikely that much
of the population will shift away from traditional American values at the same
time. Its immigration provides an energy
and a source of renewal that is unique in the world. Yet we have been very reluctant to admit that
a major effort is required from everybody to get out of our predicament. As in France, the Obama administration has
hesitated to tackle public spending and has played the “tax the rich card”. Had it stated that taxes would be raised on all
Americans to make up for any shortfall in public cuts, we would be more
advanced on the path to recovery. There
still is time, and there is a far more vigorous public debate in this country
than in France or Argentina as to how to regain our economic health and achieve
better social harmony. But the clock is
ticking and the dangers of failing to act are in plain sight for all to see.
No comments:
Post a Comment