Before I return to the plane of national politics let me first relate how bad things have gotten in the French economy via the story of a friend I will call “Charles” in this piece. Charles is an experienced and successful real estate agent in the South of France. While his clientele ranges from old-line French families Gulf Arabs to the occasional American it is increasingly Russian in composition. The weak French economy has not yet destroyed the allure of the Côte d’Azur as a vacation destination so Charles’ business is good except that he gets to keep little of the fruits of his labor as his combined corporate and personal tax burden exceeds 80%.
It is not news that France imposes a high tax burden nor that many French entrepreneurs hedge-funders and bankers have fled France primarily for London. Indeed the English capitol is often (albeit erroneously) referred to as the “sixth largest French city” and candidates for French national office routinely make London a campaign stop. However finance and internet jobs are reasonably transportable. What is remarkable to me and demonstrates the depth of the problems facing France is that a real estate agent who intends to continue to sell French properties is so desperate to reduce his tax burden that he is leaving France for England. Other than gravediggers there are few professions more tied to the land than property agents; yet it has apparently gotten so bad in France that Charles is moving to London. As a “non-dom” in the UK Charles reckons he can work half as hard and earn twice as much after tax.
So with this sad tale as context I return to the macro level. At the end of August Francois Hollande disbanded his Socialist government agreeing with Prime Minister Valls to purge the cabinet of left-wing hot heads such as Minister of Industrial Renewal Arnaud de Mountebourg (as famous for his grandiloquent defense of French industrial jobs as for his blindness to jobs that could be created in the new economy. This week newly reconfirmed Finance Minister Michel Sapin abandoned France’s commitment to the EU-mandated 3% budget deficit target for 2015 and admitted that the country will not achieve this goal before 2017.
As dire as this may all sound these are good developments and signs that President Hollande is finally getting to grips with the real challenges facing France. He is no longer pretending that the French state can protect every job at Peugeot build a modern digital economy operate a huge welfare state and at the same time meet Germanic austerity targets. In a August 28 Op-Ed piece in the New York Times economist Paul Krugman correctly argued that austerity is the wrong policy for France contrasting the German obsession with balanced budgets to the US Federal Reserve’s expansionist monetary policy over the past few years. However I believe he misses the mark in lauding the health of the French economy and blaming long-standing French malaise on false media assessments of the underlying strength of the economy.
My view is that postponement of smaller budget deficit targets must be linked with true underlying economic reforms of the French economy. Indeed Chancellor Angela Merkel of Germany hardly a radical reformer herself this week called on fellow European leaders to press on with economic reforms to open up their economies and drive growth. This takes great courage on a continent in which politicians have long lied to their electorates and used soaring government debt as the means to reconcile spendthrift social programs with weak growth.
Santa may well be European as the proud Finns claim but neither he nor ECB President Draghi nor Francois Hollande can achieve real economic growth deficit reduction low inflation job creation preservation of existing jobs a short workweek early retirement generous social programs and adequate military defense and international engagement. This summer Francois Hollande ran the numbers and figured this out; let’s hope it is not too late for this socialist to lead a liberal revolution.
