The Corner

A Little Local Difficulty

France’s government has run into trouble. The prime minister, Manuel Valls (who only got the job in March) submitted his resignation to President Hollande after the finance minister  attacked his own government’s economic policy.

The Wall Street Journal gives some background:

In interviews with the French press and speeches at a Socialist gathering Sunday, Economy Minister Arnaud Montebourg and Education Minister Benoît Hamon said forcibly reducing budget deficits as the economy wilts is driving up unemployment, fueling political extremism and risks tipping the economy into recession.

“The priority must be exiting crisis and the dogmatic reduction of deficits should come second,” Mr. Montebourg said in an interview with Le Monde published ahead of the annual Fête de la Rose meeting of Socialist Party activists at Frangy-en-Bresse in eastern France.

The minister also turned on Germany: “We need to raise the tone. Germany is caught in the trap of austerity that it is imposing across Europe.”

Mr. Hamon joined Mr. Montebourg’s call for a change of course. He said the Socialist government needs to reconnect with its electorate and boost demand by increasing tax cuts for households after defeats in local and European elections this year.

Montebourg (very much a man of the left) is right, dishonest, wrong and evasive: all those things. He’s right because the pro-cyclical effects of austerity are likely to make a bad situation in France worse (and by shrinking activity in the economy, and thus the tax base, may perversely increase the deficit). At the same time, the notion that he would ever support a reduction in spending of sufficient size to make a difference to France’s bloated public sector lacks, shall we say, credibility. And he’s wrong about Germany: Germany can afford to relax things at home (and probably should), but agreeing to a relaxation in the broader euro zone’s budgetary rules  (the spectacularly misnamed ‘Stability and Growth Pact’) is something else altogether. It raises the specter of runaway spending elsewhere for which Germany will one day, one way or another, end up picking up the tab. And he’s evasive: so far as I can see, he is a supporter of continued French membership of the single currency. To be sure, he’s on record as favoring a weaker euro, but a straitjacket is still a straitjacket even if you loosen the belt a few notches.

There are no easy options for France, but returning to the Franc (or, somewhat less traumatically, opting for participation in a southern euro) would allow the country to re-price its goods and services to a level that reflects market reality, paving the way (fingers crossed) for the export-led recovery that could provide cover for the structural reform (fingers crossed so hard that it hurts)  France so badly needs.

Hollande may also be a man of the left, but he’s having none of what Montebourg is selling. French presidents neither appreciate a mutiny nor the prospect of a very ugly conversation with Chancellor Merkel. He’ll stick with Valls and what the French call austerity and a plan to create enough budgetary space with spending reductions to allow business taxes to be cut in exchange for a pledge to create 500,000 jobs over the next three years (and no, I have no idea how that would work).

The BBC notes that Mr Hollande’s approval ratings in the polls have sunk to 17%, while Mr Valls’ have dropped to 36%. There is little or no economic growth. French unemployment is rising and now stands (officially) at around 11 percent. In absolute terms the number out of work is 3.4 million, not a healthy state of affairs in a nation where politics has a way of spilling into the street.

Thank heavens the euro zone crisis is over!

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