Brigitee Granville and Hans-Olaf Henkel ask: In his classic comedy “Tartuffe, or The Impostor,” Molière shows that allowing pride, rather than reason, to dictate one’s actions invariably ends badly. French President François Hollande appears to have an advanced case of Tartuffe’s malady, repeatedly making political pledges that he cannot honor, partly because of factors beyond his control – namely, the European Monetary Union (EMU) – but mostly because he lacks the determination.
For France, the consequences of Hollande’s failures will be much more dramatic than his political downfall. Indeed, the country could be facing catastrophe, as Hollande’s actions risk miring the economy into sustained stagnation and driving an increasingly angry French public to elect the far-right National Front party’s Marine Le Pen as his successor.
France’s economic policies are untenable, meaning that both of the main determinants of those policies, the EMU and Hollande’s approach, must change radically. So far, that does not seem to be happening.
Earlier this month, an opinion poll showed Hollande’s approval rating plummeting to 12% – the worst result for any French president in the history of modern polling.
Consider unemployment, which in September stood at 10.5%, compared to only 5% in Germany. Hollande acknowledged that, despite his pledge, a reversal of the negative employment trend “didn’t happen” this year.
France’s unemployment problem is the result of leviathan labor regulations and a crippling tax burden on labor. Hollande’s main new promise – not to impose any new taxes, beginning next year – might have been an implicit acknowledgement of this.
In the meantime, however, there will be an increase in diesel excise duties, and a 20% surcharge on property taxes will be imposed on unoccupied second homes in densely populated areas.
Hollande’s track record: the tax burden has risen by €40 billion ($50 billion) over the last two years. A Hollande official stated Christian that more tax hikes could not be ruled out.
EMU places considerable external constraints on French policy.
The euro’s creators were wrong to expect that the common currency would promote economic and political convergence among its members. By ruling out exchange-rate adjustment to address differences in competitiveness, the euro has forced less competitive countries to pursue painful and slow “internal devaluation.”
The deflationary impact of internal devaluation is compounded by the rule, reinforced in the 2012 “fiscal compact,” that eurozone countries are wholly responsible for their own debts and thus must adopt strict budgetary discipline. With demand relentlessly squeezed, not even depressed wages can generate adequate employment.
The only solution, many euro supporters now contend, is full political union, which would allow for fiscal transfers from the eurozone’s more competitive countries to their weaker counterparts. But southern Italy, which has not used the fiscal transfers from the north on which it has long depended to transform its economy or boost productivity, demonstrates how little impact this approach can have. The notion that a eurozone fiscal union could do better is a dangerous fantasy.
Another potential approach would be for strong eurozone economies, especially Germany, to support productivity-enhancing structural reforms in less competitive countries like France and Italy. This is probably what German Chancellor Angela Merkel meant when she reportedly said that, though Germany “cannot afford transfers to the whole of Europe,” it can “help to pay the doctors’ bills.” But, sooner or later, the weaker economies will probably opt out of such reforms, reclaiming their monetary sovereignty as a necessary – though far from sufficient – means of averting economic and social breakdown.
