This post is available in pdf format My Tuesday Column – 1 October 2018
French public debt stands at close to 100% of GDP, but is this really a cause for concern?
No – it is important not to overstate the importance of this figure. French statistics body INSEE made the news as it measured public debt at over 100% of GDP for 2017, when it included railway operator SNCF’s debt. However, this is no longer the case, with debt accounting for 99% of GDP in the second quarter of 2018.
The chart shows two phases in French public debt trends – before and after the 2008 financial crisis. The State increased its debt issues and thereby smoothed the way for macroeconomic adjustment to the crisis by spreading out the shock that hit the French economy over the longer term.
We can see that the figure then rises again after 2010, but this is not a specific feature to France. It reflects slower growth in the French economy over the longer term, and a welfare set-up that failed to change to adapt to this new trend: so soaring public debt denotes a sluggish adjustment from French institutions.
In other words, the primary role of public debt is to help spread the load at times of economic shocks, but it skyrockets when the economy is slow to adjust to new economic conditions.
Is the 100% of GDP threshold a problem or not?
The figure itself is impressive and somewhat symbolic, but it is not necessarily damaging for economic momentum per se. Japanese public debt stands at 240% of GDP, yet the country has come through the financial crisis better than others judging by per-capita GDP: the country does not seem to be in danger of default.
The real problem is that we do not know just when public debt can actually become detrimental. Rogoff and Reinhart indicated in their research that public debt begins to dent growth when it moves beyond 90% of GDP, and this rule at least partly spurred on the European Commission’s austerity policy in 2011 and 2012. However, this argument does not hold water: R&R’s calculations were wrong and there is no rule on excessive public debt. Continue reading
The French government is currently scaling down its growth forecast for 2018. In the initial budget the expected growth rate was 1.7% but was upgraded at 2% in April before being scaled down to 1.7%. Bruno Le Maire the French minister of the Economy and Finance also announced yesterday that the public deficit was expected to be wider in 2018 and 2019. He crosses fingers to maintain it below 3% of the GDP in 2019. For 2018, the deficit is now forecast at 2.6% vs 2.3% expected in April.
The French growth story this year is interesting. During the first two quarters the growth number was only at 0.16% on average compared to 0.69% on average for 2017 (all the figures are non annualized). This is a division by more than 4. It’s a kind of sudden stop. Continue reading
The Q2 growth number for the second quarter was disappointing in France. It was just 0,158% (non annualized) which is rounded at 0,2%. It’s the same figure than in Q1 (0,153%).
Carryover growth is just 1.3% for 2018 at the end of the second quarter. The government growth target in the 2018 budget is 1.7%. This is attainable if growth is at 0.55% in Q3 and in Q4. We can’t imagine the reason of this stronger momentum during the second half of 2018.
Households consumption is the weakness of the French growth since the beginning of the year. Change in the purchasing power was negative in Q1 for fiscal reason (higher taxes) and was probably negative also in Q2 due to a higher inflation rate. Corporate investment was higher in Q2 (good news) after a very weak number in Q1.
For 2018 we can expect a growth figure close to 1.5% which will be way below the 2.3% seen in 2017.
This mean that the public deficit target at 2.3% of GDP will not be reached. It will remain close to its 2017 level at 2.6%.
The French football team is all set for the FIFA World Cup final in Moscow on Sunday, but would a football win propel France into the leading position in Europe in terms of growth too? And looking to the euro area at large – would it make up for Germany’s defeat in the early stages of the competition and Spain’s poor performance? Or to put it another way – we may wonder whether the ECB may consider changing its monetary policy stance if Mbappé and Griezmann were to score during the final. Continue reading
Angela Merkel’s interview last week-end, in the Frankfurter Allgemeine Zeitung, doesn’t not really change the usual German answer on the renewal of European institutions. Her responses remain at odds to Macron’s proposals.
The main difference between France and Germany on the European question is that France thinks that there is an advantage in explicitly coordinating economic policies. A budget can and must do that. This implies a significant intervention capacity which can
be measured by several points of GDP as it has been stressed by Macron and Sarkozy before him.
On the German side, co-ordination is implicit if one respects the defined rules, in particular those which could be taken in the case of a help from the EMF (European Monetary Fund which would take over the European Stability Mechanism. It would be different from the IMF which has a too friendly approach to the Greek debt restructuring). In other words, the adjustment mechanism requires respect for the “right rules” (budgetary austerity) and therefore deeply reducing the need for state intervention.
The coordination advocated by France is the vision of risk sharing within a political entity (the Euro Area) while the German option is that of not sharing the risk because if everyone behaves “in the right way” no country has a risk to share. Continue reading
After just one year it is still too soon to make a full assessment of the Macron presidency, so the question we must answer is whether the measures taken by his government over this first year are the rights one to tackle the changes we have witnessed worldwide.
In part 1 of this series, I outlined the need to make growth more self-sustaining, even in a context of ongoing globalization. I described the need to raise the innovation aspect in our investment, and the necessity of making the labor market more adaptable to better address change. Recent research by Gilbert Cette et al uses a broad international comparison to suggest that high employment protection legislation in France leads to capital-to-labor substitution. This would explain high investment levels in France. However, the authors note that the innovation component of this investment is inadequate and does not sufficiently bolster productivity. Another conclusion of the report is that a more flexible labor market means higher quality capital.
And this equation lies at the very core of the supply question in France: capital needs to be more efficient, while the labor market needs to be more flexible in its ability to adapt. I noted in part 1 that steps taken to support public investment along with government labor market decrees help ease these restrictions and promote an adjustment in supply.
But we have seen two other watersheds in the world economy that the French economy must now address if it is to further integrate i.e. the location of production and the location of innovation.
The second shift is the geographical location of production. Continue reading
This month marks Emmanuel Macron’s first anniversary as President. It is too soon to make a full assessment of his presidency, as he has already said himself that he wants to be judged on the full five-year term, but it is also too early to make that call because the very positive economic outlook overall could skew our analysis somewhat. Business indicators in France followed trends in the euro area, displaying a robust performance followed by a downturn.
The latest example of this is this year’s first quarter growth figure, which slowed to 0.3% in France and 0.4% in the euro area, after the country posted showings in line with its European neighbors in 4Q 2017 at 0.7%. Business leader surveys also reveal similar findings.
Economic policy still to show its mettle
It is still too early to sift out the effects of the government’s economic policy from the impact of the overall economic context, and in this respect, 2018 budget performances will provide a useful benchmark. The budget deficit came out at 2.6% in 2017, falling below the infamous 3% mark for the first time since 2007, primarily as a result of growth picking up from 1.1% to 2% between 2016 and 2017. Growth is expected to come out at 2% in 2018, flat vs. 2017, so it is government policy that will shape public finances this year and the public deficit will act as a good gauge of policymakers’ achievements.
However, there is one thing that has most definitely changed over the past year – the way the international community talks about France and its President, both investors and others. International spectators are more interested in the country, reflecting on the one hand the arrival of this newcomer bursting onto the world political stage, and on the other his active international involvement, particularly in promoting Europe. Continue reading