http://jpdumas007.blogspot.fr/2017/05/response-to-d-rodrik-french-binding.html





Response to D. Rodrik "Can Macron Pull it Off?" in Project-Syndicate-2017-05



Yes, the election of the energetic, open, liberal Macron over the xenophobic and the statist Mme Le Pen is certainly a motive of pride for the French, they did not fall into the populist trap followed by the Americans and the British. Yes “if Macron fails during the next five years, Le Pen will be back with a vengeance.”



Yes Macron has today no operational political party and it is unlikely that he will get a majority in the National Assembly to confirm the Prime Minister he will choose and to use executive orders to implement its program. T. Piketty’s economic policy represents traditional French socialist-yesterday ideas (always more state intervention, a universal salary for all to fight against unemployment, and the traditional tax and spend policy).



Yes employment should be the top objective of a lucid President (it was not the case of the previous ones, in spite of the official lines).



Now I fully disagree with your solution, which does not take into account France’s characteristic (the French “binding constraint” IMF/F&D/Hausmann, Rodrik, & Velasco, 2006, this the so important concept you coined and you don’t apply it to France).



The public expenditure ratio is the French binding constraint. It was 46% of GDP in 1980 and 56.5% in 2016 (+11 points in 30 years), it is always rising; the highest level in the world (against 44% in Germany, 35% in the US in 2016). This has considerable negative effects on the economy (this expenditure ratio implies a strong tax burden thus low appropriability, low growth, high unemployment, private sector’s crowding out by the public sector, a "service public" mentality instead of an entrepreneur mentality (which used to be a French word). The result of it is: a declining potential GDP (which is permanent), economic decline and high unemployment.



There is virtually no evidence that raising more public expenditure will increase employment. If E. Macron wants a five-year €50 bn stimulus plan, he will have to reduce recurrent (permanent) public expenditure by…€80 bn to reduce permanently the expenditure ratio to at least to 52% of GDP in 2022. The solution is the opposite of a Keynesian one, it consists to reduce the French’s expenditure ratio at the level of 50% (which will be more or less at the average EU level).



The idea to converge toward a Eurozone fiscal union, with a common treasury and a single finance minister, a Eurozone budget is wishful thinking. Germany and other Nordic countries will never accept it and this is a way of escaping the issue. Germany will never accept “permanent fiscal transfers” from the surplus countries (Germany, Netherlands, Greece (yes Greece has a fiscal surplus in 2016), Luxembourg, Estonia, Ireland, Latvia, Lithuania, and Malta) to France. France must reduce its fiscal deficit, not through tax increase (what have done Sarkozy (2007-12); incidentally, Madame Lagarde was her Minister of Finance, and F. Hollande (2012-17), incidentally, Mr. Macron was his Minister of economy) but through expenditure reduction. The argument saying that this Eurozone budget will be under the control of Euro Parliament (there is no Eurozone parliament) thus will be a factor of accountability is not very convincing, as far as I know, the respected US Congress and French Parliament are not the best guarantor of fiscal rectitude… The argument saying that “fiscal unification” would make possible for France to increase infrastructure spending and boost job creation without busting fiscal ceilings is a traditional leftist argument; it consists to transfer my deficit to other countries who are so stupid that they will not notice it…or this deficit will create so much economic growth that it will disappear, if it were true, France will be the fastest-growing country in the world (the French budget was in the red for 40 years).



This is not by asking surplus countries to finance France’s profligacy that there will be permanent job creation. In this case, I don’t understand, why you don’t use the same argument for a country much more in need than France, Greece, and why not Italy, Spain…I personally understand the reluctance of Germany to be the aid donors of profligate countries (needless to say that the transfer will always be from Germany to Southern countries). This simplistic Keynesian policy is nothing else than a mask to postpone the necessary expenditure adjustment needed for France. The US automatic transfers from rich states to poor states seem to exist more in academic books than in the reality. The French tax system is too high and with so many distortions that it could not be accepted by other Euro countries and this is what is at stake behind the ideology of “fiscal union.” It is, in my view, wrong to say that a monetary union needs a fiscal union, it needs fiscal discipline because the member countries have no currency.



So for a country as France, the pertinent concept to use is not the dear Keynesian fiscal deficit, but the French’s “binding constraint” public expenditure to GDP ratio, which is increasing in a sclerotic country as France. French structural constraints will not disappear with a higher fiscal deficit financed by other countries. The macro strategy for France consists in my view 1) to reduce pubic expenditure (there is extensive room to curtail public recurrent expenditure in France (too many civil servants, pension too generous, not enough working hours, too much and not targeted to the poor welfare expenditure). 2) To reduce at the same time the tax burden on profit and labor which is the highest in the EC. 3) To reduce all limitations on the private sector and employment, these together and if done quickly and strongly could have an immediate effect on confidence and job creation. The lack of fiscal space in France obliges it to perform a supply-side policy not a simplistic Keynesian policy.

