The upheaval in France brings to the fore an economic debate taking place in many countries: whether to launch deficit spending to exit the wake of the global financial crisis, or whether to stick with budget-balancing austerity. In France the issues are not as clear-cut as, say, in the USA. The Japanese 20-yr sag has been studied less seriously across the pond than here.
A French or Euroland anti-deficit hard-line amounts to accepting the policy of Germany’s Angela Merkel (AKA Bismarck) while higher government spending (including for social programs which have no stimulus impact on growth and may interfere with it) is considered to be more purely French or European. More spending is the platform of the Socialist left-wing in my countries.
M. Montebourg also added to his red appeal by public attacks on French and foreign business leaders, mostly gratuitous. An element of the French population hates either business or foreigners or both. So populist left and far-right (like Marine Le Pen) like to show how ant-business they are.
In Paris, to criticize balanced budget belt-tightening as leading to renewed recession is not just an economic judgment; it is also a political statement. That is why Arnaud Montebourg had to be removed from the cabinet on Monday in a 2nd switch for 2014 under unpopular Pres. François Hollande.
However, offsetting that move toward hawkishness in France was the statement by European Central Bank president Mario Draghi calling for more stimulus and growth in Euroland. He made these remarks at the Jackson Hole bankers’ conference, but they herald new policy in the EU. Lower interests rates, a proto-QE policy of buying longer-term bonds, and above all, a drive down of Euroland exchange rates will offset the rules “Mme. Bismarck†has imposed on the ECB. It will also help businesses which export.
If Draghi’s ECB starts buying bonds, particularly longer-term ones, so as to lower borrowing costs and weaken the euro, this should boost business without the capitals, like Paris, having to get into deep deficit spending as Montebourg wants. The ECB can make policy on behalf of the entire euro-block of countries, including Germany, where business surveys show that the outlook is poor despite Merkel’s popularity.
Countries facing lower output or negative growth include Italy, France, Cyprus, and (ja) Germany. Annualized H1 growth of 0.1-0.2% (a statistical error?) was reported by Finland, Belgium, and Austria. For the EU as a whole growth in H1 was 0%, down from 0.2% a year earlier. It did not meet the lowball consensus estimate of 0.1%.
