France’s Top Central Banker Tells the Government To Shape Up

by Veronique de Rugy

This morning, the Wall Street Journal has a piece about Christian Noyer, who runs France’s central bank. He has some choice words for the government of Françis Hollande, saying it’s time to restrain government spending and reform the labor market, among other things. The piece:

“The underlying objective,” Mr. Noyer writes, “is growth. Not just a temporary spurt, sustained artificially by public spending, but strong and lasting growth that creates jobs and is based on the development of modern and competitive production capacity. This kind of growth cannot just be summoned up. It requires a profound change in public policy.”

Consider France’s inflexible labor market. Mr. Noyer says France “is one of the biggest spenders on employment policies in the developed world, but it still has one of the highest levels of unemployment.” The central banker argues that France’s various programs and incentives to boost employment are undermined by their sheer complexity.

He also asks a fundamental question: “Do these subsidies not serve to offset market rigidities that could in fact be addressed directly at a lower cost and with more effective results?” In almost any other country, the question would answer itself. But to argue for “flexibility” in France is to risk the barricades. Maybe it takes a central banker to say that the emperor creates no jobs. . . .

Noyer’s third truth concerns government spending, which is 55% of GDP. “For the past ten years,” he writes, “France has had one of the highest levels of public spending in the world. Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence” (our emphasis). For this reason, trying to stimulate growth through a spending binge is bound to be counterproductive. Businesses and households, anticipating higher future taxes to pay for the binge, will cut back, offsetting any boost from deficit spending.

The whole thing is here. However, if you read French, here is the central bank’s report, which is really worth digesting. 

In the opening letter, Noyer notes that French economic growth in 2013 will likely be close to zero for the second consecutive year. He also warns of high and worrisome levels of debt and notes that social spending is unsuitable. He has a very interesting passage about how government spendign can stimulate the econonomy in the short term if certain conditions are in place, and stresses the fact that Keynesian stimulus can only work if it is temporary. Stimulus was tried in France in 2009 in an environment that wasn’t conducive to growing the economy, and there is no reason to expect that it would work better now. In fact, there is actually reason to believe that it would operate as a brake on economic growth (which, for France, would mean sliding back into recession). He also seems to think that the French government has exhausted its ability to gather more revenue with tax increases on French people and businesses.

I am not sure how well this message will be received in France, where the president has been calling for multiple new tax increases, a reduction in the retirement age, and more stimulus. But I hope he will listen to Noyer. It seems to me that instead of complaining about austerity, which in France has mostly take the form of private austerity (i.e., tax increases), France should focus on the problematic policies that have made fiscal restraints so necessary.

Incidentally, Cato Journal has an entire issue on austerity. It’s called “Europe’s Crisis and The Welfare State: Lesson for America,” and has many very interesting pieces, including one from my professor at Paris IX Dauphine, Pascal Salin.

But I’d like to highlight the piece by Juhan Parts. Parts is the minister of economic affairs and communication for the Estonian government, and served as prime minister from 2003 and 2005. His piece details the ways that Estonia managed to get out of the recession and stay in budgetary balance. For the most part, the Estonian government stuck to a formula of cutting spending and staying away from fiscal stimulus. How a country goes about fiscal consolidation is of great importance, and the issues are specific to each country implementing a policy. For instance, Parts’s piece makes really interesting points about the role that monetary policy played in Estonia’s successful consolidation before and after Estonia joined the euro zone. It has also a good section on labor-market reforms. That said, Estonia is a small country and its circumstances may not apply to other bigger countries, but again, there is much to be learned form their experience. Here are some of the key lessons from fiscal adjustment in Estonia, according to Parts:

The role of decisionmakers is important even when all the odds seem to be against them. It took courage to follow the chosen path when international bankers, organizations, and prominent economists were convinced that our decisions would lead to a disaster. Estonia’s economic performance and ability to tackle the most challenging economic situation with radical economic policies in the difficult climates is a clear indication that fiscal conservatism and economic liberalism work well in any economic circumstance. 

Our experience suggests that the best way to respond to the current debt crisis in Europe is by pursuing conservative fiscal policy and carrying out economic reforms. Obviously, fiscal consolidation in the eurozone can affect the demand for Estonian exports and slow down our recovery in the short run. Nevertheless, this can be compensated by lower interest rates and trust in the long run. Estonian experience makes it clear that the currency peg to the euro and joining the eurozone offers benefits as long as a country is willing to carry out structural reforms and keep the books balanced. This, of course, implies that government is willing and able to carry out necessary reforms.

From our perspective, the common currency in Europe can work as long as eurozone member countries carry out sufficient fiscal consolidation and structural reforms and stick to the principles of fiscal
conservatism and economic liberalism.

The whole thing is here.


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