In France, Keynesians Lose a Fellow Traveler

By Fabio Rafael Fiallo

Keynesians aren't happy with French President Francois Hollande, and they are blatantly making it known. At the source of the disgruntlement lies Hollande's January 14 press conference, in which he questioned the effectiveness of Keynesians' pet policy, i.e. lavish public spending, and emphasized his preference for supply-side measures -- notably lower taxes and levies on enterprises as well as reduced public spending -- to deal with France's economic slump and eroding competitiveness.

The virulence of the attacks is directly proportional to the expectations that Hollande's election as president of France raised among Keynesians. They considered him, if not one of them, at least someone willing to stand up to German Chancellor Angela Merkel's austerity policies.

Those expectations were not unwarranted. During his presidential campaign, Hollande had promised to "renegotiate" (translate: rewrite) the so-called European Fiscal Compact that had been adopted by 25 EU members, a Berlin-inspired agreement designed to ensure fiscal discipline within the EU. The renegotiation was expected to facilitate counter-cyclical public spending in the region.

The prospects of Hollande becoming the Keynesians' anti-austerity champion, however, soon began to fade.

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Once elected, Hollande was unable to modify the fiscal compact and merely managed to get Merkel's approval for the introduction of an innocuous, safe-facing appendix to that treaty.

A few months later, Hollande made a timid incursion into the supply-side world. He instituted a tax credit system aimed at giving some breathing space to French enterprises overwhelmed by taxes and levies that impair their ability to compete and create new jobs.

Keynesian sympathies for the French president withstood those policy betrayals, as was seen in November 2013, when the ratings agency Standard & Poor's downgraded France's sovereign debt due to "the government's inability to significantly reduce total government spending." The S&P decision prompted the Keynesians' primus inter pares, Nobel laureate Paul Krugman, to rise to the defense of France's public spending (56 percent of GDP) and to attribute the downgrade to ideological considerations.

The aforementioned press conference of January 14 was the straw that broke the proverbial camel's back. Keynesians couldn't bear hearing France's president, their former fellow traveler, overtly lean toward a supply-side policy vision. They struck back with furor.

The first to speak out was Paul Krugman, who qualified as "intellectual collapse" Hollande's new, un-Keynesian economic policy stance.

Financial Times analyst Wolfgang Münchau, for his part, accused the French president of being two hundred years behind in economic theory. The reason: Mr. Hollande adhered to supply-side economics, a school of thought that is identified to a certain extent with the 19th century French economist Jean-Baptiste Say.

The Guardian's Dean Baker knocked even harder, asserting, with a staggering smugness, that the superiority of Keynesian "stimulus" has by now been established beyond doubt, "contrary to Mr. Hollande's 19th century platitude."

Empirical evidence does not validate Keynesians' barrage of invectives and intellectual arrogance.

Indeed, European countries exhibiting low unemployment rates, with Germany and Switzerland at the forefront, have rejected the Keynesian addiction to public spending and have, instead, espoused budgetary rigor.

Drastic public spending cuts didn't prevent Ireland from reviving economic growth and the United Kingdom -- where 400,000 public jobs have been eliminated -- from registering growth rates significantly higher than other European countries: 1.4 percent growth in 2013, with an IMF forecast of 2.4 percent for the current year. (The IMF corresponding figures for France are 0.2 percent in 2013 and 0.9 percent forecasted for 2014.)

After having adopted supply-side policies and cut public spending, Spain and Portugal have, contrary to France, been achieving competitive gains and improving their trade balance. Spain emerged from recession in the third quarter of 2013 with unemployment receding over the last three quarters.

All these encouraging developments in neighboring states help to explain why President Hollande decided to take a look at supply-side recipes.

Be that as it may, France cannot afford to maintain its public spending spree. It can either allow the public deficit to soar along with public spending -- and risk a spike in interest rates charged on France's sovereign debt -- or raise taxes and levies so as to contain the deficit, leading to a further deterioration of the country's competitiveness.

Keynesians haven't shown their cards, though. For it is far from certain that Francois Hollande has the necessary political support to prevail over hard-left protests and trade union pressures. Much remains unclear about the actual content, magnitude and pace of such reforms.

Little wonder that a few days after Mr. Hollande held his press conference, the rating agency Moody's, while leaving for the time being unchanged the rating of France's sovereign bond, presented a negative outlook of the country's economy and put into doubt "the likelihood that [Hollande's] plan will achieve its stated goals."

Chances are, therefore, that Hollande's supply-side dalliances will end in disaster. And if that turns out to be the case, Keynesians will jump on the occasion and put the blame not on the mendacity and indecisiveness of France's president, but on the supply-side policies that they abhor.

Fabio Rafael Fiallo is a Dominican-born economist and author and a retired official of the United Nations Conference on Trade and Development (UNCTAD).

(AP Photo)

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