Friday, May 30, 2014

Some Cats Just Hang That Way

Poor François Hollande. He has maneuvered himself into a box that seems to be inexorably shrinking as in Poe’s The Pit and the Pendulum. His national polls rating is about 18%, if not lower, and the so-called Socialist party received only 14% of the votes in the elections for the European parliament. Today the polls reveal that only 3% of Socialists think that he should run for a second term three years from now. The converging walls of his box may well push him into the pit.

The reader of Poe’s story never knows how the prisoner got into his box. But here the parallel ends because the reasons for Hollande’s uncomfortable situation are pretty clear. During his election campaign he promised to convince his European Union partners to drop their support for austerity and switch to stimulus at the European level. His first act as President was to visit his dominant partner, Angela Merkel. Soon after his takeoff for Berlin, his plane was struck by lightning–certainly a bad omen. And when he finally arrived, he found Angela adamantly opposed to the idea.

Next, he met one by one with those neighboring prime minsters whose countries were–and still are– suffering most from austerity. But these conservatives all believed that salvation comes only through suffering– that is, the suffering of Europe’s unemployed and minimum wage workers. Since Hollande favors strengthening the European Union, he did not wish to weaken pro-Union sentiment in France by making a public campaign against EU economic policy. That left him little alternative but to reduce the deficit while diffusing an optimistic public message, and hoping the upcoming German election would push German policies to the left.  Since that election, the German government has moved a bit to the left but far from enough.

Hollande’s first budget emphasized increased taxes rather than reduced expenses. This is controversial among economists, but the macro bloggers I know say that if political constraints oblige a government to reduce deficits during a recession, increased taxes do less harm than reduced expenditures. This may have been right from an economic point of view, but it was the wrong decision politically, because it left him open to scathing attacks from his opposition.

The next problem was the Gallois report. Hollande’s first prime minister, Jean-Marc Ayrault, had named Socialist leaning Louis Gallois to prepare a report on the competitivity of French industry. Gallois has had an outstanding record as president successively of the SNCF (French railroads) and of Airbus Industries. He is also popular because he has refused to accept the excessive salaries which other top executives demand. But Gallois is a manager, not a macro economist, so he fulfilled his mission with a series of supply side recommendations, most of which are desirable but not likely to have any rapid effect on the overall economy.

Next, Pierre Gattaz, President  of the Mouvement des Entreprises Françaises, made the unlikely claim that if the government reduced social charges on businesses, French companies would hire a million more workers. Hollande immediately called his bluff and  proposed the Pacte de Solidarité, which the government is still trying to negotiate. This pact is not certain to pass the legislature because many deputies doubt that businesses will keep their side of the bargain. And there is no reason for them to hire more workers if their order books are empty due to weakness in aggregate demand. This has left voters confused because reducing business taxes seemed like a contradiction of his campaign platform.

In my layman’s opinion, a more effective measure would be to incite French enterprises to improve or expand their productive capacity through immediate write-offs of new equipment purchases; that is, expensing new equipment, rather than amortizing it over several years. Additionally, the government should offer liberal loan guarantees for small business investments. These supply side measures should also stimulate aggregate demand, even if a good part of the new equipment came from abroad.

Back to Hollande’s box. After Socialist losses in local elections last month, Hollande named a new government under dynamic young Prime Minister Manuel Valls, who promised to find 50 billion Euros in economies, notably by rationalizing regional and local government structures. This has long been recognized as a necessary reform, but recent governments have not had the courage to address the problem, because of the myriad of local political interests which will be threatened. This proposal has not made the Socialists any more popular, because of uncertainties over how the new structures will operate.

Through all this, until last Monday, Hollande had not tried to furnish an honest explanation of the situation to the French public. I suppose he thought that if heads of governments couldn’t understand basic macro economics, the general public wouldn’t either. Also, since the European Council of prime ministers and presidents does not conduct public meetings, voters don’t know know what Hollande has been doing to advance his ideas at the European level. There seems to be a gentle(wo)men’s agreement among heads of governments not to publicly badmouth the Council or any of its members. The result is that the public sees a deficit of democracy at the European level, because heads of governments take nearly all the important decisions in secret.

Although Hollande has has avoided shifting the blame to the European Union, a significant minority of the French electorate has begun to do so, and many of these voters have turned to the Front National. Meanwhile, the FN has cleaned up its act since Marine LePen took over the leadership. Although the FN remains opposed to legal or illegal immigration, they have eliminated any openly racist expression. Although they remain excessively nationalist and advocate leaving the Euro and the EU, their positions on social policy have moved to the left, enabling them to attract many disillusioned Communist and Socialist voters.

The underlying cause of French unrest has been the continuing rise of unemployment, which, in April, reached 3,364,000 out of a population of nearly 66 million, or an increase of 500,000 since Hollande took office. The French electorate is now beginning to realize that their government has no power to create a macro economic climate favorable to full employment. France and 17 other Eurozone nations have effectively given up their fiscal sovereignty, without creating any supranational entity to exercise that fiscal sovereignty in common. To govern the continental economy Europe is now obliged to fall back on a static body of European treaty rules which remain unadapted to the current stagnation in Europe.

Poe’s prisoner was saved in extremis by the French army, which is a highly unlikely ending to our present story; the General Staff and the Minister of Defense have already threatened to resign if their budget is reduced any further. What happy or tragic outcomes remain possible?

1. The French electorate agrees to suffer indefinitely,
2. The French electorate chooses to leave the Eurozone and possibly the European Union under an alliance of parties including the Front National.
3. The rest of the world economy recovers strongly, and France is saved by doing nothing.
4. The European Union, especially Germany, abandons the myth of expansionary austerity as a remedy for recession.

Outcome N° 4 is the most passionately to be desired, but your humble blogger is not hopeful. Please bear with me while I recount a personal anecdote to explain my pessimism. 

My wife and I used to run a residential language school in the French countryside where we taught French to adult foreigners. During the warm summer evenings, we would leave the windows open as we sat around the dinner table practicing our French. As dinner progressed, our several well-mannered cats would jump in the windows and silently beg choice tidbits from our students. One evening, we could see that one greedy feline was irritating a German student. As we moved to expel the offender, our dedicated student advised us in French and in all seriousness, “These cats need more discipline.” There you have the French problem in a nutshell.