Europe's Crisis, Europe's Future

5. France: Part of the Solution or Part of the Problem?

93 On November 17, 2012, The Economist published a special issue on France. On the cover, baguettes wearing berets were collected in a bucket, like sticks of dynamite, with fuses; the story described France as a “time bomb ticking at the core of the Eurozone.” It got a big reaction. “Another British treachery” was the most objective reaction heard in Paris; Minister Arnaud Montebourg used much harsher words. Surprisingly, and contrary to expectations in the City, the story did not result in any trouble on the debt markets. On November 12, the meaningful aspect of French economic policy was to be seen in the recent and widely praised adoption of real measures to improve competitiveness. Irrespective of this episode, French imbalances in the summer of 2013 raised serious issues that could turn into major policy frictions. In the spring of 2013, the European Commission, in its “In-depth review for France,” expressed deep concern and demanded more adjustments. The French government , however, takes comfort in the fact that interest rates on the French debt are extremely low, that economic activity showed a slight improvement in the second quarter, and that a French recession would make the European outlook much worse. Beyond these figures and the institutional European debate about “stability,” there lies what will become a major issue in European conversations: the appropriate balance between austerity and growth, which dominated the spring meetings of the IMF. The French government France: Part of the Solution or Part of the Problem? jacques mistral 5 94 jacques mistral welcomed the IMF view that too speedy an effort to rebalance the budget in a weak economic situation could prove counterproductive. This view, however, is not widely shared in Berlin; Germany still expects its French partner to be more decisive in applying the rules agreed upon. The purpose of this chapter is to assess France’s role in the management of the eurozone crisis: will it be part of the solution or part of the problem? The present French imbalances have deep roots. This is why I place them in a longer-term context that I summarize as “a lost decade.” I then report on and assess the decisions made by the government after François Hollande’s election in May 2012. Finally, I explore the challenges and the opportunities for the government if it wants to escape the present dilemma and in particular improve the Franco-German relationship. A Lost Decade Given the present condition of the French and German economies, it is difficult to remember how different the situation was in the early 2000s: France had been surprisingly successful during the 1990s, and Germany, tangled up in the difficulties of reunification, was the sick man of Europe. The Economist , in 1999, expressed open stupefaction: “The most perplexing question about contemporary France is this. If, as champions of economic liberalism argue, France embodies all the vices of an over-sheltered, welfare-cushioned, state-stifled, centralized, quaint and archaic European model, then how does it manage to be such a vibrant and prosperous place?” As I write in 2013, the situation is exactly the reverse. Much has been written to explain the German miracle; but how could France have managed its own affairs so poorly as to fall so quickly from that elevated and celebrated position to the tumble-down and debilitated place it today occupies in European affairs? Days of Glory The 1990s were dominated in Europe by two events, the reunification of Germany and the establishment of the European Monetary Union (EMU). While Germany was struggling to unify two very different economies under a single currency, France was mobilizing to successfully manage the coming adoption of the European currency. The policy was defined by a simple motto, “competitive disinflation,” introduced by Jean-Claude Trichet (1992) at the beginning of the decade; and it worked! Jacques Delors, finance minister under François Mitterrand, had already stopped a vicious wage-price spiral by ending the indexing of wages; thus France in the 1980s had broken with france: part of the solution or part of the problem? 95 its traditionally high inflation rates. But Trichet (against strong opposition from a vast majority of the left) went further, organizing what would later be known as “internal devaluation” within a fixed exchange-rate area: moderate wage increases would gradually improve competitiveness, exports, jobs, and tax resources. That plan, plus structural reforms such as the reduction of...