What’s The Matter With France? / Paul Krugman - New York Times Blog.

Paul Krugman - New York Times Blog

What’s The Matter With France?

 AUGUST 27, 2014 8:58 PM / http://krugman.blogs.nytimes.com/2014/08/27/whats-the-matter-with-france/?_php=true&_type=blogs&_r=0

As I mentioned this morning, France’s President Hollande, after years of passivity, has finally taken strong action – firing anyone who questions his subservience to German and EC demands for ever more austerity. But what’s actually going on in the French economy? It is, of course, a catastrophe – hugely uncompetitive, failing to create jobs, etc. etc. – that’s what everyone says, so it must be true, right?

Actually looking at the data, however, reveals a number of surprises.

Let’s start with jobs. France has low labor force participation by the relatively old, thanks to generous retirement programs, and by the young, partly because generous aid means that few need to work while in school, partly perhaps because a high minimum wage and other factors discourage youth employment. What about prime-age workers? Figure 1 compares France and the United States. It’s a good thing we know that France is the country in crisis, isn’t it? Because otherwise you might get confused by employment performance that looks much better than ours.

Still, we know that France is highly uncompetitive on world markets. Figure 2 shows the French current account balance as a percentage of GDP, which is in, um, mild deficit, nothing like the deficits the United States ran during the “Bush boom”.

It’s interesting to note, by the way, that in the great European divide during the euro’s boom years, when costs in southern Europe surged relative to Germany, creating a huge problem of adjustment, France was – as you can see in Figure 3 – right in the middle, with no particular sign of getting out of line. This puts it in a somewhat awkward situation now that southern Europe is deflating while Germany refuses to inflate, causing an overall deflationary bias in Europe. But this isn’t a French problem so much as a euro problem.

Speaking of deflation, France – as you can see in Figure 4 — is well below the conventional 2 percent target (which is too low) and falling fast. Mr. Hollande may like to say that the French problem is supply-side, but it sure looks like demand-side by this criterion.

Still, France has to worry about bond vigilantes. After all, international investors are so worried about French prospects that they won’t lend to the country without being paid … well, the lowest rates in French history (Figure 5).

OK, you get the picture. French economic data look nothing at all like the story everyone tells. Yes, you can tell stories of excessive regulation, but they don’t dominate the macro picture. Yet Mr. Hollande is meekly going along with demands for ever more belt-tightening, reserving his wrath for those who want France to stand up for itself. And the result is a sort of multiplier process in which austerity causes growth to falter, which worsens the budget prospect, which leads to even more austerity.

What’s going on here politically? Simon Wren-Lewis makes a very good point. In America, many of the people who shape economic discourse are forever living in the 1970s, when stagflation was the order of the day; in France, the corresponding nightmare is the early Mitterand era, when France was suffering from Eurosclerosis and an attempt to pursue unilateral fiscal expansion (with a fixed exchange rate) failed. But now is not then. To an important extent, what ails France in 2014 is hypochondria, belief that it has illnesses it doesn’t – and this hypochondria is leading it to accept quack cures that are the real cause of its distress.