Is France now the greatest threat to the eurozone?
After months of uncertainty, vagueness and ineffectual diplomacy, a sort of quiet calm has descended upon the eurozone. Fears of an immediate collapse have been assuaged by the installation of technocratic governments in Italy and Greece, whilst the yields on Spanish, Italian and Irish sovereign debt have fallen to manageable – if not entirely ordinary – levels. Greece’s recent structural default has removed the sense of imminent catastrophe that has persistently plagued the vitality of global markets, whilst the recently-elected Prime Minister of Spain, Mariano Rajoy, has provided new hope in the ability of the eurozone’s fifth-largest economy to address its financial woes by implementing a comprehensive and much-needed austerity package.
It would be recklessly premature to pronounce that the worst is now over, but one could be forgiven for clinging to the hope that these developments offer. Forgoing democracy in the interest of economic stability is unpalatable to many – this author included – as is the inexorable flow of taxpayers’ money into bailout funds that ostensibly treat the symptoms of economic profligacy rather than addressing the causes. From a British perspective, however, an end to the eurozone crisis by any means represents the revitalisation of economic activity in our largest export market and, by extension, a flurry of activity that would prove invaluable during a period in which Britain teeters on the brink of a return to recession. This is a fact that would not be lost on those rating agencies which recently put the United Kingdom’s credit rating on “negative outlook” at least partially owing to the lack of demand for British goods on the Continent.
Yet in spite of the fresh optimism emanating from the eurozone, there remains a considerable threat to the tentative recovery that is currently under way: were France to suffer the same fate as its eurozone compatriots, the recent eurozone crisis would no longer be perceived as the eye of an economic tempest that is now slowly passing over, but as the calm before a storm so destructive as to be unparalleled by any economic quandary in recent history. Curiously, the plight of the French public finances has largely been shielded from press scrutiny; even when Standard and Poor’s stripped the nation of its triple-A credit rating in January, few – if any – alarm bells were sounded, and no major news outlet sought to consider the colossal implications of France failing to get to grips with its ailing finances.
It is therefore reassuring to find that the Economist has chosen to lead on this very subject in its latest issue. According to the magazine’s leading article this week, public spending in France as a percentage of GDP is, at 56%, higher than that of Sweden. Indeed, the Cour des Comptes has warned that unless “difficult decisions” are taken in the immediate future, public debt in France could reach 100% within three years. Were the French finances to reach such a state of disrepair, no number of carefully-orchestrated bailouts would be sufficient to restore order. The eurozone’s current afflictions would be dwarfed by the challenge of restoring order in a country with an economy almost four times as large as those of Greece, Ireland and Portugal combined.
With the first round of the French presidential election just a few weeks away, and with the First Secretary of the French Socialist Party, François Hollande, likely to take office, a study of his prescription for the French economic malaise makes for harrowing reading. Hollande cut his political teeth working on François Mitterrand’s failed 1974 presidential election bid, and possesses many of the same convictions as the man the French people knew as Tonton (‘uncle’). He has fought the presidential election on a platform that appears to be diametrically opposed to business and free market-inspired growth – one of his flagship policies is a 75% top rate of tax on income over one million euros, a proposal that has been met with derision by France’s plethora of multinational corporations such as AXA and L'Oréal. Underpinning his vision for France is a pledge to roll forward the frontiers of the state, irrespective of the implications this might have for France’s long-term economic health. Increases to the minimum wage and a “partial” retrenchment of Sarkozy’s proposal to increase the French retirement age from 60 to 62 are just two examples of a president-in-waiting who has formulated his electoral platform with no recourse to the fiscal imperatives currently facing France.
Perhaps still more worrying than Hollande’s statist vision, however, is the receptiveness of the French people to his counter-intuitive vision for France. Save for a fleeting resurgence in the polls by Sarkozy following the tragic shootings in Toulouse a few weeks ago (where matters pertaining to Islamic fundamentalism are concerned, the French tend to rally behind their Right-leaning president), the Socialist presidential candidate has enjoyed enormous support across France, with 61% of French voters backing his proposed ‘millionaire tax’. But even a Sarkozy victory would now be unlikely to ameliorate France’s continuing decline, for, in seeking to gain traction with the French electorate, the incumbent president has catapulted to the Left on a range of issues. Having already raised corporation tax, Sarkozy has also pledged to reprimand anyone seeking to leave France via the taxation system, as well as proposing that Internet companies are taxed on sales they make to French consumers.
At a time when private sector-fuelled growth represents France’s greatest hope of gaining a modicum of control over its economy – and avoiding a capitulation that would have grave repercussions across the world, nowhere more so than in the United Kingdom – French voters face a choice between an fervidly statist candidate with a contempt for private enterprise and an incumbent president doing everything he can to shed the perception that he is the ‘President of the Rich’. Regrettably, it is a choice that the French welcome; in spite of France’s economic prosperity in the modern era owing almost entirely to the globalised nature of the country’s diversified economy and the entrepreneurial vitality of those that head its many successful businesses, the French demonstrate an antipathy towards the free market that is almost entirely unique in the Western world.
But the French electorate’s successful pursuit of a Left-wing agenda is a Pyrrhic victory; whether Sarkozy holds on to power or Hollande takes his place, by focusing the entirety of the 2012 presidential election on persecuting the rich – with an occasional nod to social issues such as immigration and perceived Islamisation – and almost completely ignoring the need to rein in spending, France is setting itself up for disaster. The only thing that remains to be seen is how profoundly this will affect those nations for whom an affluent and innovative France is critical.