The key debate among journalists these days is what will happen to ‘Merkozy’ if Hollande wins on Sunday - and most seem to agree that it would indeed be a drama for Europe. The Economist even thinks that Hollande would be dangerous for Europe.
I think the Economist got it wrong for the following reasons: Firstly, they tend to overlook how poor the reform balance of Nicholas Sarkozy actually is. Sarkozy wanted to shake things up in 2007 but ran out of steam after fiddling with the 35-hour work week and raising the minimum retirement age from 60 to 62. His most recent move has been to reduce labour costs by cutting social insurance charges on payrolls and raising value-added tax on goods and services instead, as Paul Taylor pointed out a couple days ago.
But did Sarkozy reform the French economy in a convincing way? No he didn’t - if he did there wouldn’t be so much talk about it right now. So why should he perform any better in his second term? At least, Hollande will enjoy the doubt-of-the-newcomer position and may be given credit that he can actually change things for the better. This could give him some political capital to cut public spending because of a “worse than expected inherited fiscal and economic situation”. He also could agree to pursue some structural reforms as part of a compromise with Germany on a European growth pact.
Secondly, the past twenty years have shown that conservatives don’t do structural reforms. Kohl was probably the most social-democratic chancellor Germany ever had. And let’s not forget that Merkel is harvesting the fruits of the ‘Harz IV’ reforms which were launched by... social democrats. In fact, the SPD is still battling with this legacy which also led to the rise of the Left Party. Austerity-Germany is manly Schröder-Germany. Merkel is actually spending again, on retirement as much as on day-care. In France, the Socialist Lionel Jospin (Prime Minister between 1997 and 2002) opened more state enterprises to private capital than any conservative prime minister. Therefore I think Hollande can initiate structural reforms, precisely because he is a socialist. Moreover, he could be able to create the necessary external conditions to boost investment, e.g. through an increased lending capacity of the EIB, some form of project bonds and changes in the EU budget. In fact Hollande has laid out all these ideas in his recent moratorium.
Thirdly, the Economist overlooks that the French economy is not performing so poorly if one not only compares it with the export capacity of the German economy. Of course, France has less ‘hidden champions’ who can sell products on the world market at nearly inelastic prices - this is indeed the great strength of the German economy. On the other hand, chief economist Thomas Fricke pointed out last week that in a long-term comparison over 20 years, the French economy seems to perform even better than the German economy: France tops Germany regarding investment, consumption and employment as well as in population dynamics. France has an investment quota of 11 percent; Germany only 3,3%. France has 3,8 Mio more people employed than in 1995 and has a better unemployment quota than Germany had between 1997 and 2008. And finally, as Fricke shows, the French GDP is 38% higher than in 1990; the German GDP rose only by 30%. So without the export hype of the past three years, there is nothing so glorious about the German economy which would justify holding it as a model for France and others. Paris still borrows at historically low rates around 3.1 % for 10-year bonds, public services works reasonably well, the country has an ideal geographical location and a large consumer market, with a well-educated workforce and high hourly productivity. This, of course, does not mean that there is nothing to do in terms of structural reforms. The French would rather live e.g. with nearly 25 % youth unemployment than see the minimum wage or rigid job protection for incumbent workers slashed. And many are unwilling to see any connection between the two. The stubborn resistance against structural reforms has a long tradition in France and also goes back to the general strike of 1995.
However, it might be fairer to argue that the French and the German economy are simply different and both have their difficulties. It is not helpful to write the French economy down in such an undifferentiated manner; and at the same time praise the German economy. The economic wisdom for European political economy will anyway be somewhere in the middle - and making this compromise happen is the best the Franco-German couple can do.
And finally, coming back to the fears of the Economist, Hollande in fact still aims to introduce Eurobonds. The markets and the City always called for the ‘Big Bazooka’ which also included Eurobonds so there is apparently an interesting, though not openly admitted connivence d’ésprit between what the City wanted in recent months and what François Hollande included in his programme; but apparently it is not good enough if it comes from a French leftie.
Angela Merkel, the queen of political pragmatism seems to have understood that the wind is changing. Last week she issued a press declaration stating that Europe needs more growth. She even mentioned that an increase in the lending capacity of the European Investment Bank would be a good idea. Isn’t it astonishing how quickly Merkel can surf the growth wave? Was there ever a confrontation? What, if there is no Hollande-drama? Also, markets seem to anticipate a victory of Hollande as there was no big financial hiccup after the first round. But Hollande is more than an old-fashioned French lefty. He is actually building up as the carrier of hope for a pan-European ‘austerity-is-not-enough’ argument that resonates rather well with people across Europe.
I have argued before that the PS and the CDU have more in common regarding institutional EU development and that, in functional terms, a struggling Franco-German couple is always better for the European leadership dynamics than a too symbiotic one. I’d like to add that we will all have forgotten about ‘Merkozy’ sooner than some may think. Instead, we will wonder whether Merkel ever loved Sarkozy; and going back to the early times of their relationship in 2007, the answer is a clear no. The era of Sarkozy would just be another unpleasant European episode that finally comes to an end.
I bet the Economist 6 bottles of Moet & Chandon that the photos of the 50th anniversary of the Elysée Treaty in January 2013 will look great, with a harmonious Merkollande couple, claiming that it just outbalanced the European economy and put it jointly back on a path of growth!
5th May 2012 at 06:05pm
« The French would rather live e.g. with nearly 25 % youth unemployment than see the minimum wage or rigid job protection for incumbent workers slashed. And many are unwilling to see any connection between the two. The stubborn resistance against structural reforms has a long tradition in France and also goes back to the general strike of 1995. »
Your article need a different point of view.
The reason of unemployment in western countries :
– Automation replace industrial, dangerous and exhausting jobs;
– Jobs go in countries with minimal wages and/or poor environmental or fiscal legislation;
– Poor salaries > poor consumption > slowing of production > closing factories;
– Productivity gains confiscated by shareholders > plumetting investments > poor salaries > etc.
– Poor salaries > indebtment > unstable financial system.
And so on.
The root of the crisis we live is the everexpanding greed. Everyone wants to be a millionaire. And finance promesses just that, with little or no effort.
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