Austerity is Bad for Competitiveness

I wrote this piece with my friend Jean-Luc Gaffard. It is part of our ongoing thinking on the early steps of the new French administration. But I think it applies beyond France.

 

The French government faces a double challenge. The short run effects of the euro crisis compound a long-standing problem of competitiveness: from 1997 to 2012, the French market share fell from 5.3% to 3.3% of world exports. France is therefore suffering more than its neighbors, notably Germany, for the current slowdown.

In response to these challenges, François Hollande designed a two-arms strategy. First, he embraced austerity. To reduce public deficit to 3% next year, the French government presented a shocking 36 billion euros budget law for 2013. That will be mostly composed of tax increases. The second arm of the government strategy, a “competitiveness pact”, was, initially, aimed at shifting an important part of the burden of social security (20 billions euros) from firm contributions to the general taxation.

Should Paris Go East?

Last week I was invited to speak at a conference on the relationship between France and Germany, 50 years after the Elysée Treaty. It was an occasion to look at France’s options for the near future.

I started by highlighting the French weakness in this particular moment:

• France suffers, like all other eurozone countries, from a protracted period of slow growth; it is the effect of the global crisis, and its vicious evolution into a local sovereign debt crisis.
• This problem is compounded by the structural weakness of France, witnessed by its deteriorating external position in the past 15 years. A loss of competitiveness that contrasts  with the increasing strength of Germany.

The commonsensical solution seems therefore to “do like Germany”: structural reforms aimed at lower wages and lower taxes on firms, in order to improve competitiveness (I did not say it, but this of course goes together with a reduced role of the government and a leaner welfare state). Nevertheless, i pointed out  that there are a lot of “buts“, that make the solution less commonsensical than it would appear at first sight: