In almost every major media source, print, television and online, one of the first comments on the recent election in France was, will financial markets freak out? To the relief of many and the despair of others, they have not as yet. That this question would leap to mind, at least to journalistic minds, is a sign of the times.
It is a question that is flagrantly ideological (if, indeed, it is intended a question). “Financial markets”, be they bold or angst-ridden, do not exist. The term is an ideological cover for a quite small group of very large international banks that conspire among themselves with the connivance of the rating agencies to manipulate bond prices. To borrow an analogy from Thorstein Veblen, the relationship between bond trading and real resources is similar to the link between bull fighting and agriculture.
Journalists who aspire to comment on economic affairs embrace this ideology eagerly. In their writings they implicitly suggest that we have entered into a new phase of conditional democracy in which the voters nominate a candidate for office, rather like in a party primary. Then, it is for “markets” to grant their consent, or reject and require the voters to offer another candidate more acceptable to the neo-monarchs of great centers of finance. As the rising of smoke signals the selection of a new Pope, the hopeful electorate should closely watch the market indicators to see who is anointed to rule.
We are told that “financial markets” have granted President Hollande a “honeymoon”, awaiting his disclaimer of the policies that induced about 52 percent of French voters to support him. The journalists offer him aid in reversing his policy promises by assuring us all that “France faces hard choices” and (my preferred cliché) “there is no money left”.
It is on the chance that the new French President does not wish to turn craven traitor to his professed principles and his electorate that I write this article. “France” does not face “hard choices”, if this cliché refers to the country’s public finances, and there is plenty of “money” around. The financial dog has not barked in the night nor at any other time, and there is little chance that it will bite the French. The interest rate on French public bonds has been falling for the last twenty years. And over recent months the story is no different. The cost of borrowing for the French government today is far less than it has been in any previous year for over two decades, at about three percent.
The falling public borrowing rate in France corresponds to the experience in other eurozone countries. In Italy the public borrowing rate at the beginning of the 1990s was almost fifteen percent, three times current rates. The high interest rates in the European Union were conscious policy, as governments sought to maintain their exchange rates to enter the soon-to-be-created “euro”. A better example of the lesson “be careful of what you want because you might get it” could not be found.
Public Finances in France
We frequently read that whatever might be the policy preferences of the new French President, he must quite quickly face the reality of the state of the country’s public finances. When he does, he will have no choice but to accept the severe constraints public finances impose on policy. This is the infamous TINA rule (There Is No Alternative) used to justify austerity policies.
The TINA rule is wrong. It should be replaced with the TAA rule (There Are Alternatives). From 1990 through 2008, the public sector deficit in France averaged minus 3.4 percent of gross national product (all statistics from www.oecd.org). Over eighty percent of the deficit (all but -0.6 percentage points) represented interest payments resulting from the borrowing policy of the early 1990s. During the 2000s up to when the global crisis broke, the deficit averaged below the dreaded Maastricht Criterion, at minus 2.8 percent, a full ninety percent of which was interest on the public debt.
As I pointed out here in an earlier article, the relevant measure for assessing the health of public finances is the deficit minus interest payments, which is designated the primary deficit. This is the measure used by the International Monetary Fund in its conditionality programs. Why it is not the preferred measure of the European Commission is a mystery perhaps best explained by economic illiteracy. Using the appropriate measure, governments of France posted tiny deficits, averaging less than one half of one percent of GDP during 2000-2008.
The full force of the global crisis hit France in 2009, when the economy declined by 2.6 percent. Output decline directly causes fiscal deficits to increase. If there are any invariant economic “laws” that is one of them. The overall fiscal deficit increased from minus 3.3 percent of GDP in 2008, to minus 7.6 percent in 2009, sixty percent of which represented revenue decline. The other forty percent of the increase in the deficit came from automatically activated expenditures such as support for the unemployed.
The new President of France aims to balance the budget by 2016. A growth policy will do that, because increases in output generate revenue and reduce social support spending. It was GDP growth, albeit weak, that lowered the deficit from minus 7.1 percent of GDP in 2010 to minus 5.7 in 2011 (with a primary deficit of minus 3.3).
Go for Growth
The combination proposed by Francois Hollande of increased taxation and a greater increase in expenditure is not only a viable alternative for France, it is rational economic policy. The part of the expansionary policy that would be funded through borrowing is certain to be at interest rates far below those during 1993-95, when the overall deficit averaged almost six percent of GDP and the public sector borrowed at over seven percent.
The new economic program devotes a substantial part of the rise in expenditure to public investment, designed to increase capacity and lower production costs in France through improved infrastructure. This is sound macroeconomic policy: a stimulus whose short term effect is to bring the economy close to full employment, and whose medium term effect is to increase productive capacity. The first realizes the economy’s potential and the second increases that potential.
When the rating agencies down-graded US public bonds last year, President Obama shrugged it off with the contempt such pernicious foolishness deserves. If faced the same action by the “malefactors of great wealth” (US President Theodore Roosevelt, speech on 20 August 1907), President Hollande should display the Gallic shrug Charles De Gaulle made so infamous.