Europe clearly has bipolar disorder. Its summits demand a single-minded focus on austerity, to correct past budget excesses. Then many of its politicians, most especially France’s Francois Hollande, reject such notions out of hand and seem determined to return to the fiscal profligacy that created today’s financial crisis. Neither course is very helpful.
The latter spendthrift route has already proved unsustainable, a
verdict recently reached by the credit rating agencies in response to
President Hollande’s seeming embrace of the old ways. The former
austerity risks a vicious cycle in which fiscal restraint creates
economic decline, which enlarges deficits and evokes still more
restraint. Greece’s latest agony, as well as recession elsewhere on the
continent, speak loudly to this dysfunction. Europe and France in
particular need a different mix.
Recent news certainly makes clear the fruitlessness of austerity
alone. The Eurozone broadly has sunk deeper into recession. According to
Eurostat, the European Union’s (EU) statistical agency, industrial
production in the region fell 2.5 percent in September alone, the most
recent period for which data is available. The weakness was widespread,
too, in every major industrial category and every region, from Germany,
considered the zone’s strongest economy, to Greece and Portugal, where
the measure fell respectively 4.4 percent and 12 percent. Measured over a
12-month horizon, industrial output has been in decline since late last
year. Unemployment rates, though uneven across the continent, are
everywhere well into double-digit percentages of the workforce and in
September averaged 11.6 percent for the region as a whole. Business and
consumer confidence fell in October to their lowest levels in three
years, and other measures of business activity continue to signal
Greece, of course, is the sad poster child for the damage inflicted
by a single-minded focus on austerity. For all the tax hikes and
spending cuts over the years since Athens began to beg for aid, the
economy and its public finances have deteriorated. Each austerity
measure seems to have driven the economy deeper into recession, raising
unemployment, reducing incomes and cutting tax revenues, even as the
growing poverty places greater demands on the government’s social safety
Most recently, with unemployment rates already close to 25 percent of
the workforce, Athens has had to engage in another round of austerity
to secure aid from the rest of the Eurozone. The finance ministry now
plans spending cuts of €9.4 billion for 2013, 20 percent deeper than the
€7.8 billion originally proposed.
The additional fiscal restraint has forced Athens to adjust down its
2013 economic forecast as well. Instead of a drop 3.8 percent drop in
the country’s real gross domestic product (GDP), it now projects a 4.5
percent decline. For all the budget restraint, the economic shortfall is
expected to widen the 2013 budget deficit from the 4.2 percent of GDP
originally expected to 5.2 and raise the expected total debt outstanding
from just under 180 percent of GDP to closer to 190 percent.
France stands as the model for the other pole of European silliness.
President Francois Hollande, who ran for office on an anti-austerity
platform, talks about growth as a means to meet budget-deficit targets
of 4.5 percent of GDP this year and 3.0 percent next, but so far his
program deviates little from French business as usual.
Hollande’s recently announced plan to improve the competitiveness of
French industry is certainly more apparent than real, consisting of
little more than a convoluted shifting of tax burdens. Recently unveiled
by Prime Minister Jean-Marc Ayrault, the program would stem the recent
flood of job losses by giving French industry payroll tax breaks over
the next three years. These, Paris claims, would reduce labor costs some
6 percent. To make up the revenue gap, the government would turn
largely to an increase in the value-added tax (VAT). While this
fundamentally temporary measure might stem a portion of the recent
torrent of layoffs, it offers little that would rejuvenate the French
economy. Not only does it merely shift tax burdens from one group to
another, but the government has retained the payroll tax itself,
offering relief only through rebates.
If this is France’s answer, it is little wonder that the
credit-rating agencies have lost confidence. Both Moody’s Investor
Service and Standard and Poor’s have stripped France of their highest
triple-A rating, accompanying the action with a sharp critique of
President Hollande’s stewardship to date. “Those measures alone,” wrote
Moody’s, referring to the latest steps taken by the government, “are
unlikely to be sufficiently far reaching to restore competitiveness.”
Not only has the rating service downgraded France, but it has put
investors on watch for future downgrades, as has Standard and Poor’s.
Given the fundamentally shallow nature of France’s effort, it is also
little wonder that the president’s popularity has plummeted. After
winning the recent election with a 52 percent majority, recent polls
show him popular with only 41 percent of the public and deeply unpopular
with 40 percent. He can’t keep his campaign pledge of sustaining the
old ways, but nor has he offered anything promising in its place.
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