Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Why Austerity Is Contagious

Ronald Janssen 27th October 2014

Ronald Janssen

Ronald Janssen

Austerity is contagious: The case of France

France is finding itself between a rock and a hard place. On the one hand, with 54% of companies reporting in the third quarter 2014 that they find activity constrained by a lack of customers, the main problem is clearly on the side of demand. On the other hand, its government has clearly abdicated from using fiscal policy to support aggregate demand and is in fact trying to do the opposite by further cutting public expenditure.

Here, it’s not just the pressure from the Commission and the Stability Pact that is pushing France further down the road of austerity. It is also and most importantly the fact that France cannot risk not to keep up with the pace of austerity as pursued by its trade partners.

The latter has to do with the fact that the deficit and wage cuts in Spain, Italy and Portugal depress domestic demand in these countries. However, their domestic demand constitutes at the same time the export markets for goods and services made in France. As a result, French exports to these countries go down, thereby also worsening the balance of external trade of France. The graphs below document this in detail and show how, in each case, exports from France have fallen over the past years and this in a systematic and continuous way.

1, Austerity Is Contagious

2, Austerity Is Contagious


Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content. We will never send you spam and you can unsubscribe anytime.

Sign up here

In fact, the wider picture is that France is now the only remaining member of the monetary union still registering a significant current account deficit, now reaching 38 billion or 2% of GDP.

Why is this a problem? The key concern is that, by having annual deficits in external trade, France is also running up its external debt position and this year after year. However, the Euro crisis has shown that the latter is not sustainable. This is especially not sustainable for members of the single currency who are, by definition, issuing debt in a currency that is not managed by themselves but by the European Central Bank. Sooner or later, and this is what did happen with Greece in 2010, financial markets will pick up on this, go into a ‘financial market strike’ and refuse further finance.

The bottom line is that austerity policy is contagious. At the risk of being singled out by financial markets because of rising external deficits, a country cannot afford to stay outside the European austerity squad completely. If surrounding economies are dragging down French export markets and exports, France is sooner or later forced to “return the favour”, squeeze its own domestic demand and in turn weaken the export market perspectives for the economies and trade partners that surround France. If not, its external deficit or, as the Commission likes to call it, its external ‘imbalance’, will increase further and become ‘excessive’.

A German locomotive?

It is against this background that French ministers Michel Sapin and Emmanuel Macron, when visiting their counterparts in Berlin recently, launched a proposal to match the 50 billion of public and social expenditure cuts that are planned in France for the next three years with a corresponding amount of new investments to be launched in Germany. The philosophy behind it is to reach a sort of European equilibrium, with cuts in aggregate demand in one part of Europe (France) being offset by a demand stimulus in another part (Germany).

The proposal certainly makes sense in terms of political strategy since it clearly puts the responsibility of internal euro adjustment also on the surplus countries, in other words on those countries that actually have the means and the opportunity to launch aggregate demand.

In economic terms, however, the proposal has one major flaw. Even if European and Euro Area member states mainly trade with each other, this intra-European trade does not function like perfectly communicating barrels. It is not correct to assume that taking away one unit of aggregate demand in France can be neatly compensated by adding another unit of demand in Germany.

This becomes clear when looking at the actual importance of trade flows between France and Germany. As is shown in the next graph, exports of goods from France to Germany only account for 4% of French GDP (5% of GDP if goods and services exports are taken together).

This presents a major problem for the Sapin/Macron proposal since it implies that their equation does not really add up. With domestic demand supporting more than 80% of French GDP and German demand for imports made in France limited to 5% of French GDP, the idea that an increase of the latter can offset a cut in the former is an illusion. Unless Germany boosts its demand by a big multiple of French expenditure cuts, the net overall effect of such an operation will be hugely negative for the French economy.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

3

In a paper from 2013, DG ECFIN formalises this finding further. This paper was, by the way, at the time reported in public media as DG ECFIN delivering itself the evidence that coordinated fiscal austerity across Europe was very detrimental for short term growth. An additional simulation carried out in the paper was to simulate the effect on the rest of Europe of a two year 2% of GDP demand injection carried out in the surplus countries of Germany, Austria and the Netherlands.

It turns out that, as could be expected on the basis of the graph above that such a 2% of GDP demand stimulus by the surplus countries would increase the level of economic activity in the rest of the Euro Area by 0,25% of their GDP only. The proposal of cutting demand and wages in one set of member states while at the same time boosting demand in the surplus member state(s) does of course help somewhat to alleviate some of the tensions but it is not the ‘silver bullet’ solution policy makers are looking for to address the dismal perspective of prolonged stagnation in big parts of the Euro Area.

What hen should be done? Surplus countries, and Germany in particular with its public investment rates at an all time low, should certainly boost investment. This, however, should be part of a European wide investment effort, with finance for this investment being mobilized and channelled through European instruments. To start rebalancing the Euro Area, we need a European investment plan.

Ronald Janssen

Ronald Janssen is working as economic policy adviser at the Trade Union Advisory Committee to the OECD (TUAC).

You are here: Home / Politics / Why Austerity Is Contagious

Most Popular Posts

European civil war,iron curtain,NATO,Ukraine,Gorbachev The new European civil warGuido Montani
Visentini,ITUC,Qatar,Fight Impunity,50,000 Visentini, ‘Fight Impunity’, the ITUC and QatarFrank Hoffer
Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse

Most Recent Posts

geopolitical,Europe Options for Europe’s ‘geopolitical’ futureJon Bloomfield
democracy,democratic Reviving democracy in a fragmented EuropeSusanne Wixforth and Kaoutar Haddouti
EU social agenda,social investment,social protection EU social agenda beyond 2024—no time to wasteFrank Vandenbroucke
pension reform,Germany,Lindner Pension reform in Germany—a market solution?Fabian Mushövel and Nicholas Barr
European civil war,iron curtain,NATO,Ukraine,Gorbachev The new European civil warGuido Montani

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

Foundation for European Progressive Studies Advertisement

Discover the new FEPS Progressive Yearbook and what 2023 has in store for us!

The Progressive Yearbook focuses on transversal European issues that have left a mark on 2022, delivering insightful future-oriented analysis for the new year. It counts on renowned authors' contributions, including academics, politicians and analysts. This fourth edition is published in a time of war and, therefore, it mostly looks at the conflict itself, the actors involved and the implications for Europe.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

Social policy in the European Union: state of play 2022

Since 2000, the annual Bilan social volume has been analysing the state of play of social policy in the European Union during the preceding year, the better to forecast developments in the new one. Co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), the new edition is no exception. In the context of multiple crises, the authors find that social policies gained in ambition in 2022. At the same time, the new EU economic framework, expected for 2023, should be made compatible with achieving the EU’s social and ‘green’ objectives. Finally, they raise the question whether the EU Social Imbalances Procedure and Open Strategic Autonomy paradigm could provide windows of opportunity to sustain the EU’s social ambition in the long run.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube