miércoles, 22 de enero de 2014

miércoles, enero 22, 2014

Last updated: January 19, 2014 6:01 pm
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The real scandal is France’s stagnant economic thinking
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Scooter antics are just a sideshow in an economy that needs a change of priorities
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French president François Hollande©AFP
French president François Hollande


When the producer has put the finishing hand to his product, he is most anxious to sell it immediately ,,, the only way of getting rid of money is in the purchase of some product or other.”


The words of Jean-Baptiste Say, a French economist and businessman, may have been written in 1803 yet they remain the mantra for supply-siders the world over. Get the taxes down, get production up, and the economy takes care of itself.


Last week, we heard another Frenchman, President François Hollande, proclaiming: “L’offre crée même la demande”, which translates as “supply actually creates its own demand”. If you want to look for the real political scandal in France today, it is not the sight of the president in a motorcycle helmet about to sneak into a Parisian apartment building. It is that official economic thinking in Paris has not progressed in 211 years.
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If you want to understand the financial crisis and the subsequent recession, Say’s Law is of no help whatsoever. Mr Hollande’s embrace of this defunct economist has three important consequences:

First, when you try to solve a shortage of aggregate demand through supply-side policies, the results are not going to be any different in France than they were elsewhere. Some targeted structural reforms such as the introduction of a single labour contract would indeed be a good idea because it could help bring down youth unemployment. But this is not going to happen. Mr Hollande’s reforms are of the tax-cut and spending-cut variety. Do not romanticise his U-turn two years into his term and compare it with François Mitterrand’s similarly-timed adoption of the “franc fortpolicy in 1983.
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The purpose of the Mitterrand’s decision was to allow France to coexist in a semi-fixed exchange rate regime with West Germany. It was a political choice of macroeconomic adjustment, not one of supply-side voodoo and ideological convergence.
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Today, there is not much need in macroeconomic terms for France and Germany to converge. They are already reasonably well aligned.
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Since the start of the euro, the French economy grew more than Germany’s. French public debt is a little higher but even on current policies projected to fall. France has a small but sustainable current account deficit. The eurozone has several countries whose position is not sustainable. France is not one of them.
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The main consequence of Mr Hollande’s shift is that it will bring France politically closer to Germany and that it will reinforce the eurozone’s current crisis resolution strategy. It is hard to overstate the natural tendency within the EU towards Say’s Law and its modern cousins. The European Commission, in particular, is so engulfed in supply-side group think that it did not see the crisis coming, let alone provide intellectual leadership in the subsequent debate. Over the course of the previous decade, European leaders wasted much time paying lip service to a programme of co-ordinated supply side reforms – the ill-fated Lisbon Agendathat never got anywhere.
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Until he was elected president in 2012, Mr Hollande seemed to offer a refreshingly alternative view. He favoured debt mutualisation and other solutions despised by Berlin and Brussels. He also criticised austerity. Nothing came of it because he lost focus once in power. In particular, he failed – or possibly never intended – to build a coalition against Angela Merkel, the German chancellor, with whom he personally does not get on. Since then, Berlin has prevailed in every single point in the crisis, including and especially most recently in the agreement to water down banking union to quasi-insignificance.
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The French policy shift will have an immediate impact on the eurozone periphery. If France goes to the trouble of aligning with Germany on German terms, expect no mercy for others. The message of righteousness will be broadcast in stereophonic quality.
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The third significance lies in the fact that the new consensus spans the entire mainstream political spectrum. If you live on the European continent and if you have a problem with Say’s Law, the only political parties that cater to you are the extreme left or the extreme right.
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One of the broader consequences of a closer alignment of France and Germany is that the EU of the future will be run increasingly for the benefit of the eurozone. This is a potentially troubling prospect, especially for the UK.
George Osborne, Britain’s chancellor, last week warned other Europeans not to confront London with a choice of accepting the euro or leaving the EU. I fear this is exactly the direction the EU will take if the French and German positions are perfectly aligned.
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As for Say’s Law, it certainly applies to itself. It is an economic theory that created its own demand from defunct politicians. What it also tells us is that the policy debate within the eurozone is largely concluded. Those who favoured a new governance framework, which once included the French, have lost.
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Copyright The Financial Times Limited 2014.

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