Can Europe Make It?

There is something very protestant and self-flagellating about this strange obsession with fiscal prudence in Europe

Marcus How
31 January 2014

The big news in the Eurozone in the past two weeks has been Francois Hollande’s announcement that the French government will cut spending by €50bn between 2015 and 2017. The tasty carrot in exchange for the stick will be cuts to taxes worth €30bn. So far, the only concrete measure to have fallen out of this is the abolition of the requirement that businesses finance family welfare. Elsewhere, individuals are supposed to benefit but no specific measures have been outlined – yet.

This ‘shift to the right’ has been greeted with warm applause in Germany and by the commentariat. Hollande has realised that he doesn’t need to increase taxes to make an omelette. It could mark the beginning of the French giving up their pre-noon red wine and dragging themselves from the sandpit of failing competitiveness and inevitable decline.

There’s nothing wrong with fiscal consolidation and tax cuts in themselves. The efficient management of resources is surely paramount to societal cohesion in the long-term. No doubt, there is low-hanging fruit to be pruned in France.

My 21-year-old self – fresh from university, unemployed, middle class – head brimming with Marxist (or Marxian, as I'd rather have it) ideas would have sneezed at such a statement. But I am no walking editorial personification of The Economist or The Socialist Worker. My philosophical orientation is to the left, but in practice I accept there is a time and a place for everything: no measure that could create sustainable economic growth should be off the table. I am a cantankerous man persuaded by evidence rather than vision. Dogmatism irritates me, regardless of its origins on the political spectrum. 

Which is why the reaction to Hollande’s U-turn is bullshit. There is something very protestant and self-flagellating about this strange obsession with fiscal prudence in Europe. Why should France cut back? Granted, its economy is unwieldy and there are plenty of areas in which taxes could be simplified and unnecessary regulations abolished. It is probably in long-term decline compared to emerging economies far away. The power shifts prompted by globalisation are proving to be costly for the old industrial powerhouses. It is an economy that is static and top heavy, dominated by large corporates. 

But look at the fiscal position of France. There is hardly cause for worry; in fact, given that debt figures are projected to fall on the back of the original, ‘complacent’ policy, it is probably sound. The budget deficit for 2013 was 4.1% of GDP, slightly higher than expected. The Eurozone average is 3.7%. Its current account deficit is 2.2%, against a Eurozone average of 0.9%. The public debt is 90% of GDP; the Eurozone average is 72.7%[i].

Based on these comparatively excessive but economically sustainable figures, efforts at fiscal consolidation in France (as they are elsewhere in many cases) are little different to a child cutting its own hair, clutching the sheared strands, and staring up at its parents with an expectant delirium that anticipates approval. Except in this case the parents don’t respond with horror. They pat the child on the head and send it on its way, before doing more of the same themselves.

I repeat: I do not have an inherent problem with reforms tagged as ‘neoliberal’ if they work. The left has done little other than to offer eloquent critiques of current macroeconomic policy in the Eurozone; solutions have been few and far between. Vague talk about the evils of austerity and the merits of renationalisation aren’t persuasive economic arguments. But then neither is the argument that freeing up the economy for the private sector is somehow going to create more supply, which, ergo, will create more demand. So deregulate! Remove those obstacles to supply, there’s a good soldier. Surely, in this day and age, Say’s law is about as convincing as the existence of Santa?

Can anyone cite cases where pursuit of Say’s law has had measurable benefits? Note: reference to the 1980s is not acceptable. Falling inflation and increasing GDP are not sufficient in themselves.

[i] These figures are approximations based on CIA and IMF data aggregated at the end of 2012. In many cases, deficits have fallen whilst debt levels have increased (e,g, Spain). Latvia has been excluded from the Eurozone averages since it only adopted the single currency in 2014. 

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