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Economics

France’s cul-de-sac

Over a year ago, in the midst of an ongoing economic crisis, François Hollande celebrated his victory over Nicolas Sarkozy in France’s presidential elections. Hollande became the leader of a country in economic turmoil. In the past year, he has had relatively free rein to carry out his economic agenda, since the Socialist Party he leads has a majority in the French Parliament.

France has a history of grandiose government spending, even among European countries. Public spending accounts for 57 percent of national output, and public debt accounts for over 90 percent of GDP. While austerity has been the buzzword in the rest of Europe since 2009, resulting in a modest decline in government spending as a percentage of GDP, France is not part of that trend.

The public sector now accounts for almost two-thirds of all direct economic activity, and more if indirect activity is counted. This large and growing dependence on government is disastrous because it is funded by ever higher taxes. These high taxes drain the private sector (while simultaneously giving the public sector an aura of impotence) and deficit spending obliges future generations of French citizens to pay off the largesse of today’s government.

Deep within the French psyche is the idea that cuts to the gargantuan public sector would cause undue harm to everyone. This inability to envision a French economy where the private sector picks up the slack when fewer public services are provided has reinforced the reluctance of politicians, and in particular, François Hollande, to use austerity measures to overcome the crisis. Instead, the current solution is to increase government spending and create more jobs in the public sector. For this reason, Hollande’s administration has pledged to increase the minimum wage for all employees, public and private, and create 60,000 new public teaching jobs.

In addition to the present increases in public expenditures, Hollande has committed to future increases in public spending. His decision to roll back Sarkozy’s initiative to raise the retirement age from 60 to 62 obliges taxpayers not only to support the burgeoning ranks of public employees “working” today, but the growing number of public retirees supported by generous social security payments.

In a bid to combat rising interest rates on its bonds, the French government has recently commenced a campaign to raise taxes to fund the country’s ballooning expenditures. Indeed, one of Hollande’s primary electoral promises was a top tax rate of 75 percent on the so-called riche (income earners above 1 million euros).

France has one of the highest corporate tax rates in the European Union, exceeding even the famous high rates of Sweden. While the European Union’s average tax rate has been decreasing (from about 50 percent in 2005 to about 44 percent in 2012), France’s tax rate has remained constantly high (over 65 percent from 2005 to 2012).

In addition to high tax rates, French businesses are faced with the highest social charges in the European Union, as well as oppressive government regulation. These factors make for an unattractive business environment. Recently several large companies closed their doors rather than deal with the difficult business conditions, resulting in thousands losing their jobs. New companies are slow to appear in such a climate.

In response to the threat of higher French taxes, British Prime Minister David Cameron, offered to “roll out the red carpet” for any high-income earning Frenchmen who wanted to avoid paying French taxes. Of course, we would be remiss to think that Cameron was motivated by anything other than to attract tax dollars into his own strained coffers. The result, however, was tax competition between states.

Before the advent of the European Monetary Union, highly indebted countries sought to cure their fiscal woes through inflationary policies. France removed this option from the table when it adopted the euro. Indeed, as Philipp Bagus demonstrates in his book The Tragedy of the Euro, it was the French who aggressively pushed for monetary integration within Europe. They must now adhere to the results of this decision.

The monetary union functions somewhat as a modern gold standard. Just as gold once kept states from running prolonged deficits, today the loss of an independent monetary policy constrains European member states in a similar way.

With no recourse to an inflationary monetary policy, the French government is at the mercy of the bond market. As lenders worry about the French government’s ability to repay their debts, now and in the future, interest rates will rise (as they have already). The French government will have to rein in its deficit spending either through spending cuts or tax increases as the cost of borrowing goes up. The private sector is already a heavily burdened minority, and given the current exodus of French companies and entrepreneurs to other countries, any further taxes would be coming from an already shrinking tax-paying base.

Like many of his counterparts, François Hollande realizes that the beleaguered French economy needs change. What he must do is focus on the areas that he can change. He must decrease public spending and lower taxes in order to increase employment. In addition, the private sector must be allowed to heal and recover, instead of treating it as a goose to be plucked. This is the only way the French government can continue to function, and more importantly, the only way to get France out of its economic cul-de-sac.

This article was co-authored with  and previously published at Mises.org.

3 comments to France’s cul-de-sac

  • Paul Marks Paul Marks

    Historically there have been “not one France but two”.

    The France of officialdom (whether under monarchs going all the way back past Louis XIV to monarchs going as far back as Charles the Great and his ruling that a “just price” was a state mandated price [other jurisdictions, in the same time period, held that a "just price" was a voluntarily agreed price] – or the officialdom of various antimonarchist regime) and of the “intellectuals” (not the French Liberal School economists – but the “intellectual” CLASS).

    And the “other France” (the traditional, voluntary, France – remote from officials and the intellectuals).

    The French left may despise the Roman Catholic Church but they still hold (like the worst of the thinkers of the Middle Ages) that “A man who keeps more for himself than he needs is guilty of theft” – that doctrine is not just bad law (making a nonsense of the whole concept of “theft”) it is actually incompatible with civilisation (civil society) and would lead to societal collapse and mass starvation, (Popes such as John XXII fought against this sort of thing for very good reasons) but the French (and other) left hold to it even more strictly than the radical elements in the Catholic Church in the Middle Ages ever did.

    Not in-their-own-case of course (there are many rich socialists who do not give all they have to the poor – and yet do not think they should be sent to prison for failing to do so, i.e. they do not IN THEIR OWN CASE confuse charity with JUSTICE, legal obligation, as the above “guilty of theft” doctrine does). But theory does matter – it matters because the French (and other) left will always support higher taxes and if anyone challenges them they will say “look there are poor people” (thus taking for granted the doctrine that the poor have a LEGAL RIGHT to all the “surplus” stuff of the non poor).

    However, traditionally in France such ideas had oddly little impact – if one went to some successful peasant and said “you must give all your surplus stuff to the poor – or I will PUNISH you” (the correct position if one is talking of JUSTICE not charity) then he would traditionally shove a pitchfork in your guts.

    Just as ordinary farmers and townspeople (even townspeople in Paris itself) have traditionally ignored the detailed state regulations on prices and what goods and services should be. In reality what mattered to them were their customers – not the edicts of the official and intellectuals.

    The “other France” (the voluntary, traditional France) was the France of most people – NOT the official rationalistic (rationalistic – not rational) of the officials and the “intellectuals”.

    What has changed is the growth of technology (communications and so on) and the spread of state education and the media.

    Now the ideas of the collectivist intellectuals can be applied to the most remote areas of France – in a way that would have astonished even the most fanatical collectivists of the French Revolution (let alone the officials of the monarchy – the political system they opposed, but whose basic idea that the state was “all in all” they shared).

    Both “left” and “right” intellectuals in Europe (and elsewhere) have the collective (“the people” or whatever name they use for the state) as the centre of their secular religion – what has changed is that, in the modern age, the intellectuals have the technical means to impose their ideas.

    And the result is tragedy.

  • Craig Howard

    Ah, yes. The rationalistic [as Paul puts it] French.

    Remember the 35 hour work-week and how that was going to, not only make life better for the workers, but create milliers de nouveax emplois because, after all, the work still needs to be done!

    Now, there is a logic of sorts in that decision, but when one’s premises are flawed, logic doesn’t produce the expected result. Tant pis.

  • Paul Marks Paul Marks

    Yes Mr Howard – the rationalistic “intellectuals” reason logically, but from false premises.

    If one’s starting assumptions are wrong, the “logical conclusions” will be wrong as well.

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