by Anthony Painter

Last Sunday, France elected a technocratic centrist. He tips slightly to the left of the centrist band but not far. He’ll shift the debate at the EU level about emphasising growth but expect incremental rather than seismic change. He’s really just a French version of Mario Monti only with a democratic mandate. The problem is that it is not at all clear that is who the French thought they were electing. They think they voted against austerity but they did anything but.

Hollande’s election slogan was ‘le change, c’est maintenant.’ More accurately, it will largely be a case of plus ça change, plus c’est la même chose – domestically at least. Hollande’s fiscal consolidation plans track Sarkozy’s for the first year then deviate slightly, returning the French budget to fiscal balance a year later. The major flaw in his economic programme is the lack of any determination to reform France’s labour markets. It has some of the heaviest regulation and highest unit costs in the EU. The best performers in Europe on unemployment are those with moderate regulation (lightly regulated countries such as the UK perform less well than the moderate group). France’s regulation is a drag on growth and employment – as is that of Spain – but these are structural concerns whereas there is an immediate issue with demand.

Overall though, his plans are largely sensible. He plans to cut small business tax, enable the state to employ the young unemployed and create a national investment bank. He intends to decentralise the French state. Any European moderate will be completely relaxed about all of this – indeed, they would applaud it. The problem was not in the programme, it was in the rhetoric. On Sunday, Hollande declared:

“In all the capitals… there are people who, thanks to us, are hoping, are looking to us, and want to reject austerity.”

The simple fact is that austerity has become defined in a very broad manner across the EU. It now basically means public spending cuts and tax increases. The bar is set very low and this narrows room for political manoeuvre. Europe’s voters (including in the UK) are being told by political leaders on the left that the choice is either growth or austerity. Would you like to chew on mud or munch a tarte tatin? I’ll have the tarte tatin please.

The problem is that, unfortunately, in this convulsive and volatile world, someone has sprinkled the tarte tatin with mud. And we’re very hungry. What to do?

Hollande has told the sadistic lot in the financial markets that France will chew on mud while telling the French people that they can feast on tarte tatin. And how do you think the voters of Jean-Luc Mélanchon are going to react when they realise what’s happened? Hatred of Nicolas Sarkozy will only take them so far. As Hollande bows down before the EU Fiscal Pact, how much more confident and forthright will Marine Le Pen become? Betrayal of trust is grist to Front National mill.

So Hollande’s hope rest on Europe. In other words, Hollande’s hopes rest on Angela Merkel and Germany. Slim chance in other words.  The fiscal pact with its debt limits, fines, balanced budget amendments and short-term deficit reduction is not up for negotiation. There will be some rider to the pact which discusses ‘competitiveness’ for which read single market extension and domestic deregulation.

Eurobonds seem unlikely. The simple fact is that once the eurozone starts acquiring its own debt then its institutions have to rapidly evolve. Germany will be very wary of simply transferring national debt to the European level which is, in effect, what eurobonds would do. It would be on the hook in a way it currently isn’t quite. Bringing forward structural funds in the EU budget seems unlikely also other than marginally  – that transfers the responsibility out of the Eurozone and into the EU.

Germany looks at the economy as an extension of moral life. It is not simply out of national interest that it treats Greece with disdain. It is out of moral condemnation. Germany’s finance minister, Wolfgang Schäuble, rejected debt-financed growth measures thus:

“That would be like vowing to improve oneself by first committing a new sin.”

And in a speech on finding a middle path between ‘Anglo-Saxon’ debt-financed stimulus and German moral rectitude, Italy’s prime minister, Mario Monti, argued that economics in Germany was “a branch of moral philosophy” and growth “is seen as the reward of good behaviour.”  For those on the left who argue for a moral economy of the common good such as that of Germany, this is the dark side of that approach which can’t be ignored.

If we want to talk moral economy then in what moral universe is youth unemployment of 50% acceptable? It’s quite clear that Greece shouldn’t be in the eurozone and Europe’s leaders are behaving despicably in not finding a way for it to exit – whether it wants to or not. The consequences will be severe but not unmanageable. A way out is needed before lunatics are in charge of Greece which becomes ever more possible as the pain deepens.

Hollande’s best hope for additional growth stimulus is two-fold. Firstly, there is scope for Germany to increase wages. Profits are currently high and it makes economic sense to ensure some of that is diverted into wages which will help to reflate the European economy. The second route is through capital investment. The characteristic of capital investment such as infrastructure spending is that it both raises short-term demand and the productive capacity of the economy. It is good debt.

An EU institution that could help in this regard is the AAA-rated European Investment Bank. Despite its profitability, it has had to cut investment over the last couple of years at just the wrong time as the chart below taken from the EIB’s operational strategy demonstrates:

A sensible move would be to return its borrowing to 2009 levels – i.e. an additional €30billion or so. In the context of the entire European economy, this is not spectacular but every little helps. This would add to Europe’s infrastructure as well as providing a slight boost to its economy.

Where will all this leave Hollande? Within Europe it will place him in the group of technocrat centrists along with Mario Monti and perhaps Mariano Rajoy of Spain who has also called for greater investment stimulus at the European level. Most likely, there will be plenty of face-saving without necessarily much in terms of substance in terms of an EU growth pact.

Domestically, it leaves him on very shaky ground. If Germany boosts wages, there is some investment at the European level and there isn’t further chaos caused by another financial crisis or a Greek exit then he might get lucky. Perhaps chaos could buy him time or jolt Germany out of its moral inertia.

But really, if the left’s political strategy is getting lucky then it’s not going to take it very far. That’s where Hollande has left himself which is a real pity because his programme has a great many strengths and he seems assured and confident. Let’s hope for all our sakes that the Eurozone and most particular Germany does significantly change course. Like Hollande, it’s largely out of our hands. He may already have made his biggest error before even taking office.

Anthony Painter’s new book ‘Left without a future? Social justice after the crash’ is published by Arcadia books in July.

Tags: Anthony Painter, austerity, eurozone, Francois Hollande, Mario Monti

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