France has outlined a 12 billion euro investment plan to modernise its economy. Beneficiaries are to include research, universities and specific sectors (energy, health). It is intended to be a signal of president Hollande’s commitment to move away from (German-inspired) austerity and towards (Gallic-inspired) growth.
So, good news? Not really. In fact the French investment plan offers a pretty good guide to why Europe is not working.
First of all it is a national plan. If we had in Europe economic governance institutions suitable for promoting, and policymakers genuinely committed to, economic recovery, we would be seeing attempts to coordinate an investment and stimulus programme (as did happen to some extent in 2009). On the demand side such coordination would increase the effectiveness of the programs by internalising demand leakage (raising the fiscal multiplier). On the supply side it would, at least in some areas, open up a potential for synergy and economies-of-scale effects.
Second, the program is laughably small. Details are vague, but it appears the program is to be spread over “a decade”. Makes 1.2 bn euro a year. That is less than 0.06% of annual GDP. S’il vous plait. Soyons serieux!
Third, and perhaps most dammingly as far as the evaluation of EU economic governance is concerned, the program is not to start until 2016. This is because of the government’s commitment under EU rules to reduce the budget deficit below 3% by 2015. As Prime Minister Ayrault phrases it “Investment and budget responsibility go together”. This is Orwellian in its linguistic reversal of fact and logic and monumental in its economic stupidity. France’s economy is in recession. Unemployment at record levels. Interest-rates are at historic lows. Monetary policy is constrained. The situation is crying out for government to borrow to invest. Instead the French government’s commitment to European fiscal rules, which do not properly distinguish between current and capital spending, are forcing it to delay the program until 2016, when the deficit will be smaller. Yes, and interest rates will be higher, unemployment lower and growth stronger. The program could well end up being pro- rather than counter-cyclical (although a strong recovery in France is unlikely in the coming years given the policy environment). This gives the lie to all those who claim that the fiscal rules are no longer “stupid” and permit effective demand stabilisation policies.
Fourth – and seemingly in partial contradiction to the last point – the program is to be partly financed by selling state assets. Reference is made to some 60 bn euro in state holdings of strategic companies. Now, one can debate whether such equity holdings make economic sense. But that debate is a strategic one and should have nothing to do with financing an investment program, especially in a context where private investors are virtually begging the French state to borrow money from them at extremely low interest rates. Moreover, it shows the one-sided focus of European rules, on government debts and deficits, without considering that governments – and France is a case in point here – also hold assets. No-one would dream of rating companies solely on their debt levels, without considering the asset side of their balance sheet. Standard capital theory tells you that, in effect, nothing changes when the state sells an asset (provided it is “fairly” valued): it gains a lump sum but renounces a stream of future income that is of equal value.
Europe is in a mess. And an important reason for that is that it remains saddled with inappropriate fiscal rules that are an obstacle to coordinated, appropriately scaled and counter-cyclical investment programs and which lack a sensible economic basis.