Saturday, April 12, 2014

France's Debt Is Bad Enough Where the EU Is Chiding France

I don't exactly have the highest threshold of dealing with government's fiscal irresponsibility, but for whatever reason, France seems to grab my attention. Is it as bad as Greece? No. But still, France does a bang-up job. Although France has a history of having a solid credit rating, its credit rating downgrades (most recently from Standard and Poor's) signals that something is amiss. Economic trends must be pointing in an even more downward direction if I end up reading in the Financial Times earlier this week how France is in violation of European Union budget rules because France cannot keep its budget deficits below 3 percent (Ministères de Finances et de l'Économie, 2014, p. 17). The French government is now in a quandary of figuring out how it can reduce its budget deficits without greatly agitating its citizenry. It might be tempting to blame this on the recession. After all, it is why these budgetary rules were implemented in the first place. Looking at France's GDP growth in recent years shows that its tepid GDP growth was an issue even before the recession.

What France needs to do to deal with debt sustainability in the medium-to-long run versus what they will do to keep the European Union placated will be two different things. This is not simply a matter of politicians, regardless of the country, who like to delay major fiscal reform as much as possible. France was the country that had its laborers strike in an uproar a few years back because the government was going to raise the age for retirement benefits from 60 to 62 years. What's more is that GDP projections back in 2012 were a lot more rosy than the current situation (Ministères de Finances et de l'Économie, 2012, p. 3). I expect a minimalist compliance with the European Union so that the bureaucrats get off France's case. As to what they should do, that's a whole different story.

I found a report by Balázs Égert over at the Organization of Economic Cooperation and Development (OECD) covering the topic of how France should reduce its debt. For those who know, the OECD is hardly a bastion of laissez-faire thought. Even so, I was surprised at how much they were concerned about France's unsustainable debt to the point where they were suggesting forms of fiscal consolidation. The major suggestions for public debt consolidation were in the arenas of the public pension system and the health care system, which is no surprise because they tend to be major drivers of federal budgets. The French government also has a reputation of being very liberal with worker benefits, which means that if France has an aging population issue (like the OECD report states), then the French government is going to need to reform labor laws so that benefits are not so generous, and so that French citizens are incentivized to work more hours and retire at a later time.

There is also the matter of dealing with France's tax rates, which are high. Although François Hollande recently claimed to be a supply-sider, I worry because France suffers under a delusion, a delusion in which one puts faith in what the people over at the American Enterprise Institute facetiously call the Krugman Curve, or the idea that an increase in the marginal tax rate translates into more tax revenue. If that were the case, the French government would have an enormous tax base because France's propensity to tax is staggering. France has one of the highest rates of tax revenue as a percentage of GDP in the European Union, as well as one of the highest rates of government spending as a percentage of GDP, both of which are problematic because it signals that France has to rely on its tax base and aggrandized government to drive the GDP (Hint: That's not how you get real economic productivity).

Without the conversation being too tangential (since we can delve into each sector and go into detail as to specifically what France can do to reduce its deficits), I suppose the point of the article is that if France is going to seriously reform its economy, it needs to tackle the more systemic issues. Its rates of taxation are too large, as is the state, neither of which can maintain solvency in the long-run. Anything short of market liberalization and cutting the excessively lavish social-welfare programs will only perpetuate France's debt sustainability issues.

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