On Friday Standard & Poor’s, the bond-rating agency, downgraded France.
The move made headlines, with many reports suggesting that France is in
crisis. But markets yawned: French borrowing costs, which are near historic lows, barely budged.
So what’s going on here? The answer is that S.& P.’s action needs to
be seen in the context of the broader politics of fiscal austerity. And
I do mean politics, not economics. For the plot against France — I’m
being a bit tongue in cheek here, but there really are a lot of people
trying to bad-mouth the place — is one clear demonstration that in
Europe, as in America, fiscal scolds don’t really care about deficits.
Instead, they’re using debt fears to advance an ideological agenda. And
France, which refuses to play along, has become the target of incessant
negative propaganda.
Given such rhetoric, one comes to French data expecting to see the
worst. What you find instead is a country experiencing economic
difficulties — who isn’t? — but in general performing as well as or
better than most of its neighbors, with the admittedly big exception of
Germany. Recent French growth has been sluggish, but much better than
that of, say, the Netherlands, which is still rated AAA.
According to standard estimates, French workers were actually a bit
more productive than their German counterparts a dozen years ago — and
guess what, they still are.
Meanwhile, French fiscal prospects
look distinctly nonalarming. The budget deficit has fallen sharply
since 2010, and the International Monetary Fund expects the ratio of
debt to G.D.P. to be roughly stable over the next five years.
What about the longer-run burden of an aging population? This is a
problem in France, as it is in all wealthy nations. But France has a
higher birthrate than most of Europe — in part because of government
programs that encourage births and ease the lives of working mothers —
so that its demographic projections are much better than those of its
neighbors, Germany included. Meanwhile, France’s remarkable health care
system, which delivers high quality at low cost, is going to be a big
fiscal advantage looking forward.
By the numbers, then, it’s hard to see why France deserves any particular opprobrium. So again, what’s going on?
Here’s a clue: Two months ago Olli Rehn, Europe’s commissioner for
economic and monetary affairs — and one of the prime movers behind harsh
austerity policies — dismissed France’s seemingly exemplary fiscal
policy. Why? Because it was based on tax increases rather than spending
cuts — and tax hikes, he declared, would “destroy growth and handicap the creation of jobs.”
In other words, never mind what I said about fiscal discipline, you’re supposed to be dismantling the safety net.
S.& P.’s explanation
of its downgrade, though less clearly stated, amounted to the same
thing: France was being downgraded because “the French government’s
current approach to budgetary and structural reforms to taxation, as
well as to product, services and labor markets, is unlikely to
substantially raise France’s medium-term growth prospects.” Again, never
mind the budget numbers, where are the tax cuts and deregulation?
You might think that Mr. Rehn and S.& P. were basing their demands
on solid evidence that spending cuts are in fact better for the economy
than tax increases. But they weren’t. In fact, research at the I.M.F.
suggests that when you’re trying to reduce deficits in a recession, the
opposite is true: temporary tax hikes do much less damage than spending cuts.
Oh, and when people start talking about the wonders of “structural
reform,” take it with a large heaping of salt. It’s mainly a code phrase
for deregulation — and the evidence on the virtues of deregulation is
decidedly mixed. Remember, Ireland received high praise for its
structural reforms in the 1990s and 2000s; in 2006 George Osborne, now
Britain’s chancellor of the Exchequer, called it a “shining example.”
How did that turn out?
If all this sounds familiar to American readers, it should. U.S. fiscal
scolds turn out, almost invariably, to be much more interested in
slashing Medicare and Social Security than they are in actually cutting
deficits. Europe’s austerians are now revealing themselves to be pretty
much the same. France has committed the unforgivable sin of being
fiscally responsible without inflicting pain on the poor and unlucky.
And it must be punished.
Source: nytimes.com
Author: PAUL KRUGMAN
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