France Calls For More Spending; Better To Reform The Business Environment

It is the age-old quick fix solution that politicians across Europe have fallen back on. When growth is slow or stalling, the government should boost its spending to revive economic activity.

This is a throw back to the Keynesian idea that by boosting the “Government Expenditure” (G) element of aggregate demand there will be a lasting effect that multiplies through the economy and so delivers an increase in real aggregate output.

Usually such a cry emanates from the left to far left of the economic spectrum. However, the latest call has come from a somewhat centralist source.

La République En Marche! (LREM “…The Republic on the move!…”), is a centrist, social-liberal political party in France. It was founded on April 6, 2016 by Emmanuel Macron, a former Minister of Economy, Industry and Digital Affairs (in a Socialist Administration), who was elected President of the French Republic in the 2017 election. Macron considers La République En Marche! to be a progressive movement, uniting both the left and the right.

France has always enjoyed a larger role for the state in GDP (56%) than say in Germany (43.9%) or the U.K. (38.5%). [As a reference the U.S. figure is 38.0%]. So, we should not be surprised that the French Finance Minister, Bruno Le Maire has issued a call to the wealthier economies in northern Europe to increase budget spending to revive Eurozone growth which is stuck at just 1.2% on an annual basis (U.S. 3.2% and U.K. 1.8%.

Le Maire said in an interview in Paris.

“…There are many countries in the Eurozone that have the means to invest more…”

The French plan to create a budget for the Eurozone designed to focus on countercyclical spending. However, this has been met with staunch opposition from Germany and The Netherlands.

President Macron initially hoped for a regular budget, with its own direct tax resources, which would be politically retrained by a Eurozone parliament. This has not really lifted off the ground as the two fiscally conservative countries that are net contributors to the EU budget, i.e. Germany and The Netherlands have stated that they will only be prepared to talk about a fund with no more than €17 Billion ($19 Billion). The French have suggested that such a sum would have no systemic significance.

In typical EU fashion the budget should be confirmed and in place by June 30, 2019, however, The Netherlands’ Finance Minister, Wopke Hoekstra has demanded a national veto over spending decisions. Therefore, the deadline looks to be delayed.

France is still putting up a brave face and hoped that whilst the budget debate drags on the European Central Bank will continue providing an accommodative monetary policy. It is also pushing for the completion of the single market for capital and a regulatory banking union.

I am opposed to the French plan because for too many years France has done next to nothing to reform itself and create an environment where business and entrepreneurial spirit can prosper.

France is superficially blessed as it enjoys political security; the troubles that dogged Greece and ensnared Italy and Spain have permitted France to bask in a tranquil and sunny valley of low yields and hence narrow spreads relative to Germany (0.33% or 33 basis points for the 10-year bond).

The national economies of the developed world, France included, all suffered since 2007 from the effects of the global recession. However, the differences between the American or British               “Anglo Saxon” economic model and the “Statist” one of France at first appeared to provide a cushion to the economy. France, it has to be said is in a league on its own if one considers developed nations and the proportion of the labour force in public sector jobs. In France this figure is 10% cf. Germany 7% and the U.K. and U.S. have measures of 6% and 3.8% respectively.

Louis Gallois was the Chief Executive Officer of EADS in 2012 when he called on the government of the day to create a “…competitiveness shock…” as the French economy was facing an “…emergency situation…”. Sadly, the pledges to do just that made by the then President, François Hollande amounted to nothing.

France carries a burden of payroll and income taxes of 48%, a figure in line with Germany. In contrast that for the U.K. is 33% and in the U.S. 32%. Given that Business Insider reports that not one country within the Eurozone features in the “Top 10” global locations in which to do business one has to ask if the tax burden has a key role in that fact.

Of the major economies the U.S is ranked eighth and the U.K. ninth, despite the Brexit troubles that haunt the nation. The leading four economies that are in the Eurozone should see the rankings send a stark signal that something is fundamentally wrong with the approach to business: Germany 24th, Spain 30th, France 32nd and Italy a dismal 51st.

I must suggest to the French government that before calling for ever more state spending, take a look at fostering an atmosphere that can boost business and creativity. That is how lasting growth is generated.