Tag Archives: France

Hollande vacillates (again)

4 Apr

This week’s cabinet reshuffle in France has done little to clarify where François Hollande stands on the key issues facing his presidency. What it has done is confirm that Hollande remains the manager of his own fractious party rather than a president with a clear political agenda.

When it was announced that Manuel Valls would replace Jean-Marc Ayrault as prime minister, it seemed that Hollande was completing his turn-to-the-right that had begun in January, in a speech where Hollande promised to cut public spending and reduce the tax burden on business. This ‘social compromise’, denounced by Marine Le Pen as an embrace of neoliberalism, was at the time seen as a new departure for Hollande. His nomination of Valls at Matignon seemed to take it further. The Financial Times complemented Hollande for ‘daring to turn to the right’ and commentators began to associate this new socialist government with the likes of Tony Blair’s New Labour in the UK, Schroder’s SPD in Germany, and the current much-transformed state of the Italian Democratic Party.

A couple of days later and the impression is very different. The appointment of Valls has been tempered by the promotion of key left-wing figures within the French Socialist Party. Arnaud Montebourg – the self-appointed spokesperson of the anti-globalization wing of the French Left – has been given a beefed up economic profile. Benoit Hamon, another prominent leftist, was made education minister, a powerful and key government department.

With such a cabinet, there is little evidence of any dramatic turn to the right in the Hollande presidency. Indeed, there is no dramatic turn to anywhere. Hollande’s goal seems to have been to manage the different currents within his own party, deploying the popularity of Valls as an antidote to his own poor poll ratings whilst compensating the left of the party with the promotion of Montebourg and Hamon. Michel Sapin’s nomination as finance minister hardly signals a radical change in France’s economic policy, given the little Sapin has achieved as labour minister. The impression Hollande gives is of placating his party rather than leading it. It may be that all along his success in the presidential primaries of 2011 was down to good luck: an absent Strauss-Kahn, strong antipathy to Valls, a weak showing by Royale and Montebourg, Aubry running rather than Fabius. Now Hollande continues to act as manager of his party’s different currents and egos, at the cost of pushing forward his own programme. There is little evidence as compelling as this to suggest that the French Socialist Party is no more than a sum of its many – and very different – parts.

It’s all about wages

29 May

The FT is running this week a series of articles (here but behind a firewall) on European manufacturing and how it is surviving the crisis. In an article on French industry, it suggests that focusing on the grim facts of deindustrialisation and declining competiveness in the North-East of the country risks missing much of what makes French industry successful. It argues that in some sectors France is following the German recipe of success: focus on cutting edge industries, invest heavily in research and development, and make the best use of a highly skilled (though albeit expensive) labour force in order to produce high-quality manufacturing products. The example it gives is of passenger jet engine-maker, Safran, and its more specialised companies like Turbomeca that make helicopter engines.

The article has some arresting facts and figures. Turbomeca is recruiting 200 new engineers this year, a reflection of its status as the world’s largest helicopter engine maker by volume. Safran, its parent company, is recruiting up to 7,000 new engineers, half of which will be employed in France. Its strategy has been to focus on R&D: 12% of its sales revenue was reinvested last year into research. On the Hollande government’s 20 billion Euros tax credit aimed at boosting competitiveness, the article cites the Peugot-Citroen CEO as saying that it will only bring down the company’s 4 billion Euros labour cost bill by 2.5%.

The article itself suggests high labour costs can be offset by investment strategies that focus on innovation and research. But the figures it gives all go to show that what matters is the ability to bring down the wages bill: either via internal adjustment or through outsourcing. Internal adjustment is what Southern European countries have been experiencing, with a positive impact on some export sectors. In France, Safran’s success comes from outsourcing 70% of its engine components. Much of the lower end manufacturing is done in countries with lower wages, a move that also matches German businesses. Another arresting fact: according to McKinsey, in 2009 the average hourly cost of a French factory worker was 32 Euros and in Germany it was 29 Euros. But taking into account the contribution of component suppliers from Eastern Europe, where wages are lower, the real cost of German labour was 25 Euros an hour.  In discussions of Germany’s current competitiveness, much is made of Schroder’s labour market reforms and the discipline shown by the country’s labour force. Less attention is given to the role played by this out-sourcing strategy. The FT article concludes with the suggestion that North Africa should become France’s low wage periphery in the way that Eastern Europe has become Germany’s, something Renault has already done by relocating some of its car production to Morocco.

There has been much debate about how France can regain some of its competitiveness. Some suggest a strategic reorientation away from traditional manufacturing towards more hi-tech activities. What seems obvious is that lowering wages is still the strategy overwhelmingly favoured by businesses. Given how unlikely it is that this occurs via internal adjustment in France, the most probable outcome is that French companies continue to exploit outsourcing opportunities.

François Hollande, a year on

7 May

hollande

A year into his Presidency, François Hollande is struggling. Of all the analyses made of his first year in office, very few have been positive. At The Current Moment, we commented extensively on the elections a year ago and on Hollande as a leader (see here, here and here). A few points are worth reiterating to make sense of today’s widespread disappointment.

It is important to remember that what secured Hollande’s victory a year ago was the prevailing anti-Sarkozy sentiment. Some of that feeling came from a rejection of the substance of Sarkozy’s presidency and so signalled a real endorsement of Hollande’s agenda. But much of the anti-Sarkozy feeling came from a reaction against his style: showy, celebrity-focused, hyperactive, lacking the gravitas expected of the President of the Republic. This list could go on.

Far from challenging this superficial rendering of politics as a matter of competing styles and personalities, the Socialists launched their own brand: normality, embodied in the rotund (but much-slimmed) cheeriness of François Hollande. He enjoys football, he makes jokes, he will govern through the country’s institutions and not above or alongside them. The notion of the ‘normal presidency’ never really stuck, not least because it lacks any capacity to inspire. But it did just enough to give Hollande the election victory on May 6th. Other factors counted too of course: his promise of a 75 per cent tax on incomes above 1 million Euros was timed perfectly to play on the anger felt towards high earners living in luxury at a time of social crisis. Even then, Hollande’s victory was wafer thin. He edged in front of Sarkozy by very little in the first round (28.63% to Sarkozy’s 27.08%) in comparison to Sarkozy’s thumping victory against Ségolène Royal back in 2008. In the second round, Hollande secured 51.64% of the vote, to Sarkozy’s 48.36%.

Throughout the campaign, the gap narrowed between the two leading contenders, transforming what many thought would be a sure victory for the Socialists into a very narrow one indeed. Hollande, an unremarkable figure until then, tipped by few as a likely winner for the presidency, certainly held his nerve. More than anything else, though, he was in the right place at the right time. This explains why his popularity has plummeted. Constructed on the back of the antipathy towards Sarkozy, the fading memory of the latter brings with it a steady erosion in Hollande’s popularity. This is not a problem of voters forgetting the past too easily. It is a product of the negative and opportunistic campaign of the Socialists in 2012.

Hollande’s difficulties today are also to do with what has happened since May 2012. The gay marriage bill has been pushed through but at the expense of a widespread societal mobilization against it, one that brought many people out of their provinces and onto the esplanades of the country’s capital. This author remembers seeing dozens of coaches, all full to the brim, tearing through the Bois de Boulogne on a Sunday morning on their way to an anti-gay marriage demonstration and all coming in from well outside of the capital and its surrounding suburbs.

One event that hit the government particularly hard was the Cahuzac affair: the admission by a government minister, the minister for the budget no less, after many months of denial, that he had a bank account in Switzerland which he kept hidden from the French taxman. The reason the Cahuzac affair has been so damaging for the government is that Hollande’s critique of capitalism, and in particular those private companies and private individuals that escape paying taxes, was always a moralistic one. Hollande presented his case against finance as a moral crusade: it was a war against the vulgar anti-egalitarian materialism of the financial class, fought in the name of the republican values of common good and a sense of patriotic duty attached to contributing to the public coffers.

Cahuzac’s secret Swiss bank account struck at the heart of this moral crusade by bringing those corrupt values into the heart of Hollande’s cabinet. In some ways, Hollande can’t be blamed for having trusted someone who then betrayed him. To misjudge someone’s character is something we have all done at some point. For Hollande, the difficulty was that there was nothing other than this moral crusade underpinning his critique of capitalism. What could have been dismissed as a mere personal failing on the part of an individual, had Hollande’s critique been more substantial, has had the effect of a devastating blow.

This crusade against finance has also been exposed to the harsh winds of the continuing national and European crisis. On this, the French government has managed to achieve very little. A central plank of Hollande’s campaign was his promise to rewrite the European Fiscal Compact, notably by injecting into it a strong growth component. Even at the time, it seemed improbable that Hollande – after the election – would travel to Berlin and tell Angela Merkel what to do. Unsurprisingly, very little in the Compact was changed and Hollande has so far struggled to dent Merkel’s determination to stick to her austerity agenda in the run up to elections in Germany in the Autumn. Promising a radical shake up of France’s sclerotic economy, Hollande commissioned a report from prominent industrialist, Louis Gallois. Focused on competitiveness, Gallois suggested a number of ‘shock’ measures which the government chose to ignore. Hollande may still pursue a reform agenda, by bringing Gallois or someone like Pascal Lamy into a more technocratic cabinet after a summer reshuffle. But there is little momentum in either the reforming or the staunchly anti-austerity direction, leaving all sides unhappy at the government’s immobilism.

Hollande has tended to make his case by courting fellow travellers, latching onto Southern European leaders like Rajoy, or more recently Enrico Letta, whose national difficulties expose the limits of the German austerity agenda. Alliance-building, however, is no substitute for a programme. As remarked upon by Current Moment co-founder Alex Gourevitch, the fact that the case for austerity is currently unravelling has more to do with the pain it is inflicting on European societies and rather less to do with any political alternative being proposed by its growing army of critics.

The political economy of Brixit

16 Jan

At the end of this week, David Cameron will deliver “the speech”: his much talked-about and endlessly-put-off speech on the place of the United Kingdom in the European Union. Choosing to give the speech abroad, in the Netherlands, Cameron is hoping to gain the gravitas of earlier famous speeches on Europe, like Thatcher’s in Bruges in 1988. After so much feverish speculation, the speech will probably disappoint. But it does raise the question of what exactly is going on with the UK and its relations with the EU. Is “Brixit” really likely? Does anyone actually want it to happen? Or is the debate only really about a more cosmetic recalibration of the UK’s membership of the EU?

The Current Moment has previously argued that were “Brixit” to occur, it would be rather in the manner of the “accidental divorce” of Slovakia and the Czech Republic: a curious historical event, where neither side was virulently separatist but a split occurred nonetheless. But how likely is “Brixit”? The Current Moment also suggested that it was unlikely given how implicated the UK is in the EU. The country is far more of a member state than its political leaders admit and finds itself active in the policymaking process even in areas where it has formally opted out.

Even if the UK doesn’t leave, current events still need to be explained. Why this particularly awkward relationship to the EU? Why the prominence of Eurosceptic movements like UKIP and the political classes’ fixation – above all on the Tory side – with reclaiming power back from the EU? Some of the explanation is historical: the UK joined later than many other members after having been rebuffed twice by Charles de Gaulle and made itself unpopular by trying to renegotiate its membership immediately upon entering. Thatcher’s long-standing battles against the European Commission no doubt left scars on both sides. But these explanations are too dated to have much purchase on events in recent years and they don’t explain the climate within the UK and the virulent anti-Europeanism of some its political class that is pushing a rather neutral David Cameron in the direction of “Brixit”.

One powerful argument is that the British establishment, and its political class in particular, does not need Europe in the same was as others do in the rest of Europe. There are various economic ties between the UK and Europe that make the case for EU membership rather strong, as Lord Heseltine and others have argued recently. But the political economy of UK membership in the EU is somewhat distinctive from other member states. In short, the UK has managed its transition away from postwar social democracy on its own, without too much reliance on the EU. Compare Thatcher and Mitterrand. At exactly the same time as the British police were – on Thatcher’s orders – fighting pitched battles against the trade unions, Mitterrand was undertaking his own retreat from Keynesianism via the European backdoor. Rather than take on the militant elements of the French working class directly, Mitterrand preferred to rely on European agreements as a way of slowly and partially dismantling the mixed economy model of postwar capitalism. Thatcher attacked the public sector directly, Mitterrand – and Kohl – did so indirectly via European directives. The same holds true for other countries – like the Netherlands, Belgium and Denmark – where old corporatist models of national capitalism were slowly reformed and wound down via a reliance on European agreements. From the Maastricht Treaty to the Lisbon Agenda to the present day Fiscal Pact, the management of socio-economic change across European societies has been conducted collectively at the European level. In the more extreme cases, like Italy, the vast swathe of the political class believes that macro-economic stability can only be achieved if the country is bound up tightly within a set of European rules. The Euro – with its Stability and Growth Pact and now with the new rules being introduced – was the apotheosis of this particular approach to governing national societies.

In contrast to all of this, Britain has generally managed the transition alone. Its own way of dismantling the postwar social contract was to isolate decision-making power from the authority of the national legislature. Politicians gave up powers to independent bodies, from the multiple national regulatory agencies to the Central Bank and the Office of Budgetary Responsibility. Decision-making was located outside of politics, but not outside of the UK as such.

For this reason, the British political class needs the EU and Brussels much less in the governing of British society. The EU is less tied up with the transformations of British capitalism than it is the transformations of national capitalisms on the continent. That leaves the door open to all the parochialism and xenophobia that animates the British political debate on the EU. This also makes it possible, though still unlikely, that the UK would leave the EU.

The Florange affair

6 Dec

As long-time observer of French politics Art Goldhammer has pointed out, there is little in the French government’s battle with the Indian steel magnate, Lakshmi Mittal, that makes sense. Uncertainty prevails over what deal the government has done with Mittal, what promises he may or may not have given, and what the future is for the Florange plant that is at the centre of the whole affair.

One thing that seems to be clear: there will be no forced nationalization of the plant, as argued for by France’s industry minister, Arnaud Montebourg. Well-known as a voice on the left of an otherwise rather centrist Socialist government, Montebourg has long championed the cause of “de-globalization”: a return to national protection and a more traditional national industrial policy of old. Montebourg plunged into the Mittal affair by criticizing publicly the Indian businessman, accusing him of not keeping his promises. His proposed solution – that gave much hope to the workers of the steel plant threatened with closure – was to force a nationalization of the plant. Mittal resisted, saying he was willing to let the government take over some of the plant but he wanted to retain those elements he thought could be profitable. At issue are two blast furnaces at Florange which Mittal argues are no longer worth keeping given the overcapacity of steel production in Europe. As demand for steel has fallen, so Mittal has been forced to rationalize production. Existing demand can be met by steel production in other sites, such as Dunkirk (read economist Elie Cohen on this here), leaving the Florange furnances without customers. As the government wasn’t ready to cough up the cash needed for a full nationalization, and many in the government were opposed to doing so, it made a deal with Mittal. Though Mittal committed himself to 180 million Euros of investment in cold steel processing at Florange, the issue of the blast furnaces remains unsolved. The government is claiming that it has saved the 629 jobs that were threatened but the unions don’t think Mittal will keep his word.

What is really at stake in this affair? In many ways, it seems distinctly French and confirms much of what The Economist wrote about France a few weeks ago in its special report on the country. Loud union reps camping out at the entrance to the site, vitriolic anti-capitalist rhetoric from leftwing ministers, behind-the-scene deals brokered between political and business interests: all evidence of the poor state of corporate France.

Beyond some of these clichés, two issues stand out. One is to do with Montebourg. His appointment as minister responsible for revitalizing French industry was surprising. As someone who harbours ambitions far grander than saving a few hundred jobs on the Franco-Luxembourg border, Montebourg could have been expected to resist the poisoned portfolio. It was obviously going to mean fighting a losing battle over unproductive sites like Florange and yet he accepted the job. What has been tested in the Florange affair is Montebourg’s representativeness. Does he stand for a strong current in French opinion and within the Socialist Party about a state-led route for industrial rejuvenation? Is it correct to see France as torn between its Colbertian instincts of old and a new recognition of the need for liberalisation and market-driven competitiveness? This is the kind of ideological battle The Economist likes but events over the last few days suggest something rather less dramatic is going on in France. Montebourg doesn’t seem to have his own industrial strategy but nor does the government. At the very least, strategies are about choices and priorities. What the government’s response over Florange has demonstrated is immobility and fright: unwilling to give up on the Florange workers and yet unable to place their intervention in this case within a wider plan for French industry. Montebourg appears as the fire-fighter in chief more than as a voice for an alternative French industrial strategy.

The second issue is about nationalization itself. Elie Cohen argues that the Florange affair is different from other recent instances of nationalization: General Motors in the US, Alstom in France. He is right to point to differences: there is little in common between Florange and the company-wide restructuring that resulted from the government takeover of General Motors. But he doesn’t mention the other obvious case of nationalization, that of banking and financial institutions. Via bail-outs, some of these have become the property of tax-payers. In all cases, this was evidence of massive strategic intervention by public actors to save a financial system they believed was on the rocks. Why is it that such interventions are free from the sense of helplessness and pointlessness that government involvement in failing manufacturing industries evokes for all observers?

Former Danish Prime Minister, Poul Rasmussen, an articulate European social democrat, once made the observation that many Western politicians appear unwilling to accept a shrinking of their country’s financial sector but they are willing to run down almost entirely their manufacturing sectors. He put this down to a deference elected representatives felt in the face of suave and sophisticated bankers. He perhaps exaggerated the point but it is certainly true that whilst government intervention to save failing industries appears to us anachronistic, intervention to prop up a tottering financial sector is seen as far-sighted and brave. This is surely as much about sentiment as it is an objective assessment. After all, a reason why the government couldn’t afford to nationalize Florange is that it still hasn’t paid off the debts incurred in saving its banks. These are the kinds of priorities the French government cannot articulate but they are nevertheless there in the background and structure government action over the mid to long term. There is no strategy there, but an underlying structure of interests and relations of power upon which French society rests.

Winds of change in France?

8 Nov

Much has been said and written about the Gallois report on competitiveness, made public earlier this week. The 31st report on competiviness produced in the last 10 years, this one had been commissioned by the French prime minister. Louis Gallois, a prominent figure in French industrial life, is seen as able to bridge the divide between French business and the French state. Relations have soured recently between the two, in particular between small and medium sized businesses and the recently elected Socialist government. Gallois’ own career has involved heading large companies that are competitive internationally but are also very closed tied to the French state. He is an emblematic figure of French state capitalism.

The report itself rightly highlighted what is a pressing problem for France: a looming deindustrialisation. France is in the difficult position of straddling an increasingly empty middle ground. On the one side, there are the high-quality goods produced by an export power like Germany, goods that remain expensive but whose quality guarantees that they dominate the high-end markets for cars and many other industrial products. On the other side are lower quality goods from Asia that win-out on price. They are cheap and good enough to crowd out slightly better quality but signficantly more expensive French-made products. Stuck in between this polarisation, France has in the last 10 years lost a great deal of export market shares. Hundreds of billions of Euros of exports have been lost and around 750,000 manufacturing jobs have gone in the last decade. This was not always so: until the early 2000s France enjoyed a strong showing on the balance of payments, not least relative to Germany. But it has now gone deeply into deficit, as the graph below shows. France has not seen the kind of reversal of fortunes that Spain, Greece or Portugal have but its current acccount deficit has been steadily growing.

The report itself recommended that the burden of social security payments should be shifted – to the tune of a 30 billion Euro transfer – away from business and salary contributions and towards generalized taxation, in the form of the CSG tax (generalized social contribution) and VAT. French economist Jean-Claude Casanova put it thus: when employees decide to have babies, companies face a rise in labour costs that in some cases can push them into the red. Bizarrely, as soon as the main recommendation of the Gallois became known – what the author referred to as a “confidence shock” for French business – the government declared that it would not be implementing this particular recommendation. It preferred a different system for lowing labour costs that involved a complex credit transfer system. Companies will have to work out for themselves what they can win back from the state through these transfers, something that favours large companies with bulging accounting departments. Smaller firms, the ones suffering most from declining competiveness, will find the system opaque and difficult to implement. Regardless of where you stand on the rights and wrongs of the labour cost/competitiveness debate in France, the government’s handling of the report was poor.

It would be wrong, though, to dismiss all this with a gallic shrug and a muttering of plus ça change. The business newspaper, Les Echos, points to one recommendation in the report likely to be taken on by the government and one which could have a very considerable impact on France in the medium to long term. Gallois proposed that French firms systematically include in their governing bodies worker representatives. In companies with more than 5,000 employees, between a quarter and a third of the members of these governing bodies should be worker representatives. Les Echos celebrates this as a signal that France will move in the direction taken up by Germany, Austria and other countries with much more successful industrial policies than France. In the German case, this rule is applied to companies with more than 500 employees. For companies with over 2,000 employees, the proportion of worker representatives in these governing bodies rises to 50%. Les Echos argues that therein lies the key to Germany’s success in turning itself round and boosting its competitiveness.

What Les Echos is getting at is labour discipline. German companies were able to boost competitiviness in the absence of currency devaluations largely because German workers accepted the cost-cutting measures being proposed, many of which were harsh and involved temporary unemployment. As well as the German government having a strong hold over unions, company directors themselves have a better hold over their own workforce. The consensual way labour and business interests within German firms implemented the competitiveness drive of the mid to late 2000s in Germany goes a long way to explaining Germany’s present export success. France has famously been an example of a very different kind of industrial relations: more conflictual, dominated by the role played by unions, resistant to change. What the Gallois report proposes is a way in which French labour could be better controlled. If implemented, this could have a far greater impact on French industry than the more public spat over VAT, CSG and how to finance social security. At least, that is what Les Echos hopes. Perhaps, in focusing on its rejection of Gallois’ proposal to raise CSG and VAT, the government is deflecting attention from other measures, that could be more far-reaching in the long term. French business-labour relations will not be transformed over night but this could be the beginning of a greater disciplining of labour through co-option into the decision-making process.

The problem with Peugeot-Citroën

25 Oct

There are some classical components to the problems faced by one of France’s best-known car-makers, Peugeot-Citroën. An economic downturn has hit Peugeot-Citroën’s sales. Its dependence on car-buying in the Southern European markets of Spain, Italy and Greece was higher than some of its rivals and so it has been harder hit by the Eurozone crisis. It hasn’t so successfully relocated production to cheaper parts of Europe, as Germany’s Volkswagen has done for instance, meaning that labour costs remain high. The decision to close its large plant North-East of Paris, at Aulnay-Sous-Bois, was an obvious case of shifting manufacturing activity out of France to places where wages are lower. Overall, margins are tight in an incredibly competitive industry and the downturn has pushed the less competitive players to the edge.

Looking more closely, though, the picture is more complex. This week, the French government intervened in the company’s crisis. Having long spoken about the need to limit the famous “plan sociaux” of big French firms, the government’s intervention was not directly aimed at limiting the number of jobs to be lost through the closure of the Aulnay plant. In fact, the government seems largely to have accepted that Aulnay will close. Instead, the intervention took the form of a bail-out of Peugeot-Citroën’s financial arm, Banque PSA Finance (BPF). Faced with the threat of a credit downgrade of 5.6bn Euros of its debt, owing to the declining fortunes of the car firm, the bail-out is reported to involve a guarantee of around 4bn Euros of debt and the supply of new credit lines of up to 1.5bn Euros.

It is no coincidence that the government intervention is in the form of a bail-out to the financial arm of Peugeot-Citroën. In recent years, the car-maker has made money not just out of making and selling cars but also out of financial activities associated to its car business. Involving itself in the provision of credit to potential car-buyers has been one way the company has managed to stay in the black. In the third semester of 2011, the total revenue of the company rose by 3.5%. However, this growth did not come from car sales as such. It came mainly from the company’s component manufacturing arm (Faurecia), its manufacturing logistics arm (Gefco) and from its bank, BPF. As with other automobile companies, Peugeot- Citroën has had to rely on revenue streams other than just those of car manufacture. As the company began to rely on financial activities, it became increasingly vulnerable to any rise in its borrowing costs. This is what is happening today, hence the government bail-out. Paradoxically, the very success of Gefco means that may be sold by Peugeot-Citroën in an asset fire-sale intended to raise much needed cash (for details on the Gefco sale, see here).

The events at Peugeot-Citroën appear as a classic case of government intervention in an ailing manufacturing sector. In fact, the government is bailing out a bank owned by the car company, set up as a way of profiting from credit provision. This suggests that it is easier for a government to channel funds in ways that keep a financial subsidiary afloat than it is to prevent mass redundancies and factory closures. It also tells us of the extent to which car-makers today rely on more than just selling cars to balance their books.

Betting on austerity

12 Sep

Recent announcements by the European Central Bank have suggested a renewed round of activism for the Frankfurt-based institution. On The Current Moment, we have commented on how the Euro has become a material constraint for a regional economy still marked above all by national variations and diversity. Previously, during the 1990s, national governments across Europe invoked the constraints of the Maastricht convergence criteria as reasons to cut spending and to elevate macro-economic policymaking to a quasi-constitutional status and thus untouchable by the masses. At that time, the Euro was more a political strategy than it was a real material constraint. Today, this has changed. Ideas become entrenched in institutions over time and are subsequently more difficult to challenge or to transform.

Looking at Draghi’s recent decisions, and seeing how promptly France has entered into the austerity camp, we can also see that the Euro serves as a sanction for the lack of political experimentation in Europe today. The claim that “there is no alternative to the Euro”, made by Draghi, Merkel and others, is shorthand for saying that there is no alternative to the approach adopted so far in response to the Eurozone crisis: backhanded financial transfers to Europe’s ailing financial sector combined with much more public austerity measures designed to reassure markets about the long-term viability of European economies.

Draghi’s speech last week – taken by some as leap into new terrain for the ECB – was a reiteration of this same approach. Though the ECB’s announcement appeared to transform the ECB into a lender of last resort, it was in fact just one big bet on austerity. The novelty of Draghi’s announcement was that bond purchases – hitherto tightly limited to precise and timely interventions – would be unlimited. The head of the ECB also promised that the ECB would rank itself as equal to other creditors, meaning that its bond buying would not result in private creditors finding themselves unceremoniously pushed behind the ECB in the pay-back queue. Taken at face value, Draghi seemed to be doing what many have argued should have been done a long time ago: transform the ECB into an institution with the powers to print money in the event of real crisis.

Looking at the decision more closely, we see that Draghi was more cautious (see here for a useful discussion of how previous bond-buying efforts by the ECB have failed to have their intended effect). What he was in fact proposing was unlimited bond purchases on the condition that needy economies commit themselves to the conditionality set by the EU creditors. His promise also rests on the very big assumption that the austerity measures being introduced across Europe will in the medium term lead to a return to growth. Because if not, then there is no amount of ECB backing that will do the trick. On conditionality, there are reasons why some governments may balk at accepting the terms coming from Brussels. Cooked up by national and European officials, these conditions are likely to be far-reaching and Spain’s leader, Mariano Rajoy, has quite a bit to loose by accepting them. On the effect of austerity, the assumption seems to be that if governments make the tough cuts necessary to get back to budgetary balance, they will also return to positive growth. Looking around Europe, this is difficult to believe.

Draghi’s move is firmly within the European consensus about the need for bailouts to the financial sector combined with drastic cuts in government spending everywhere else. This approach, unsuccessful so far, sits as the only idea pursued by policymakers of all political stripes. The Euro appears as both a material constraint upon an uneven and diverse regional European economy and an obstacle to any kind of political experimentation in macro-economic governance.

Still no alternative to austerity

24 Aug

An interesting post on austerity over at the Economist’s Free Exchange blog. It makes the point that British business – generally in favour of austerity measures when they were first introduced back in 2010 – is now beginning to change its mind. It’s not difficult to work out why: Britain is facing a third quarterly decline in GDP, with a 0.5% contraction in the British economy expected for the second quarter of 2012. For the UK this is particularly galling given the fiscal boost of the Olympics and the expectation that this would mean a heady summer for at least some British businesses. Perhaps it is true that as many people left the UK as entered it for the Games, making the net effect close to zero.

The Economist’s post suggests that the tide is perhaps turning in the UK, with austerity giving way to a new consensus around pro-growth measures. It notes that Cameron’s government is considering an “economic regeneration bill” for the Autumn and that Boris Johnson – with an eye perhaps on the Tory leadership – is talking up the need for big government infrastructure projects (based around London, of course).

The difficulties faced by the UK economy should give food for thought to those arguing that the route to economic growth lies via an exit from the Eurozone. One might have expected the UK to boost competitiveness through cheapening its currency but – on the contrary – the British pound has become something of a safe haven for those with lots of cash. Life outside the Eurozone may mean currency flexibility and low borrowing costs but that isn’t helping the British economy. The debt burden for individuals and businesses, incurred in the heady pre-2008 years, is still depressing growth and holding back new investment plans.

The idea that the tide is turning at the level of elite opinion is difficult to substantiate. There were always voices calling for moderate fiscal stimulus alongside cuts in government spending. Back in 2010 the debate between the Tories and Labour was not about whether the government should drastically reduce spending – both agreed that it should – but it was all about timing. Shock treatment versus gradual reductions eased along via some discretionary spending. Austerity was the backdrop with the debate focused on how, not if. Little, it seems, has changed.

As noted on The Current Moment last week, the debate in the US presidential campaign is also about how the government’s deficit can be reduced, with both camps fighting over who is more credible in their deficit-cutting plans. In France, a government was elected with an ostensibly pro-growth agenda. In his campaign speeches, Hollande regularly fulminated against austerity politics, claiming he represented an alternative. And yet – bar the few measures introduced that are intended to put a little more money in people’s pockets – the real challenge for the Hollande government is the 2013 budget and finding the money to meet its balanced budget obligations. Much to the chagrin of the left of the Socialist Party, Hollande has signed off on the EU’s fiscal compact with little regard for the growth measures he had promised. Budget cuts will be financed in part via higher taxes but also via spending cuts. The Greek premier, Antonis Samara, is about to undertake a desperate trip to Paris and Berlin where he will ask for a bit more leeway in his efforts at balancing the Greek deficit. Merkel and Hollande are shifting all responsibility for the decision on whether to grant Greece an extension to the Troika, as if the issue was a technical one to be decided by accountants from the European Commission. From the US through to Europe, there is little evidence that the tide is turning.

Even though economies are stagnating under the burden of austerity measures, the intellectual case for an alternative still needs to made. Until then, it will be more of the same.

France’s Golden Rule

13 Aug

At the end of last week, France’s Constitutional Council announced that the recent European treaty on economic governance was in conformity with France’s Constitution. This avoided a complicated constitutional amendment procedure by which the European treaty would have been made compatible with French constitutional law. France’s president, François Hollande, is now freer to introduce the terms of the treaty by way of a simpler parliamentary procedure.

The reaction to the decision has been varied across the political spectrum. The far left has expressed its dismay at the imminent entry into law of a treaty they see as being far too focused on budget cuts and austerity, with little attention paid to growth. Having campaigned so firmly on the slogan of growth rather than austerity, the left of the Socialist Party feels the President has broken his promises. The right argues instead that the Constitutional Council’s decision means that the bite has been taken out of the treaty: rather than inscribing its terms into the constitution, the government is obliged merely by an ordinary law which it could in principle revoke. The famous “Golden Rule” by which governments would be obliged to aim for balanced budgets has been watered down. It is time for excessive spending Southern Mediterranean-style, claims the right.

The Constitutional Council’s decision is interesting for a number of reasons. Firstly, the attention and importance attached to this decision reflects the central role played by this institution in French politics. This has not always been the case but in recent decades, there has been a firm juridification of French political life, evident in the way political questions have been recast as legal matters (for a history of the Council, read Alec Stone Sweet). Secondly, in terms of the decision itself, the Council rightly argues that there is nothing in the treaty that violates in any absolute sense national sovereignty. This points to a broad trend in European integration today: new initiatives are predominantly undertaken in the form of agreements between national executives, with little by way of transfers of power to supranational bodies. The present treaty is no exception to this general rule and there is little in it which identifies how exactly the treaty rules will be policed. Thirdly, the Council also rightly argues that the adoption of constraining rules with regards to government spending – and macro-economic policymaking more generally – is in fact nothing new. It is a continuation of a trend already well-established in the 1990s with the introduction of the Maastricht criteria. And the French Constitution already contains within it an explicit orientation towards balanced budgets. Those opposing the treaty on the grounds that it violates national sovereignty are well over a decade behind.

This leaves us with is a key paradox. European treaties are the work of national executives and they do not empower supranational agents. But in substance they limit further the discretion that these national executives have to make policy. At the heart of Europe today we find national politicians who exercise their authority by binding themselves at the European level. The broader problem here is that rules – whether constitutionally enshrined or not – have replaced discretion as the basis for political decision-making. The political point at stake here is whether or not tigher controls on government spending will help or hinder a return to growth in Europe. And it is the difficulty national governments have in commanding the consent of their populations to the cuts they are envisaging which explains their preference for a collective, rule-based set of policies.

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