Nobel winner defends France

Nobel Prize winning economist Paul Krugman - Photo: Prolineserver

Economist Paul Krugman says government was punished by ratings agency for 'sin' of raising taxes and not cutting welfare

By Peter Hawkins

IS THE French economy actually in crisis, or do ‘Anglo-Saxon’ economists enjoy claiming that it is?

Last month the credit ratings agency Standard & Poor’s downgraded France again from AA+ to AA, essentially a way of criticising the state of the French economy and its ability to repay future loans.

It met with instant dismissal from the government, which said the agency had overlooked future pension reforms; it also prompted an unexpected opinion piece in support of France in the New York Times. In his article entitled The Plot Against France, Nobel Prize-winning economist Paul Krugman argued France was being “punished” by the agency for dealing with its debt by raising taxes rather than dismantling welfare systems.

“France has committed the unforgivable sin of being fiscally responsible without inflicting pain on the poor and unlucky. And it must be punished,” he concluded.
Agencies such as Standard & Poor’s were advancing an “ideological agenda” he said, “and France, which refuses to play along, has become the target of incessant negative propaganda”.

In November last year The Economist branded France ‘The time-bomb at the heart of Europe’ sparking a furious reaction.

France continues to push for the creation of a public European ratings agency as it too believes the so-called Big Three (S&P, Moody’s and Fitch) are not neutral and are pursuing ideological agendas.

Co-director of the Center for Economic and Policy Research in Washington DC, Dr Dean Baker, said there was truth to a ‘France-bashing’ sentiment among economists, but that did not mean no legitimate criticism could be made of the way it was dealing with its economy.

“Economists look at France as a country with a 35-hour work week, a government that accounts for more than half of GDP, and provides its citizens with top-notch healthcare and childcare – and want to say that this can’t work. They almost get angry that it does,” he said.

“I recall many economists predicting disaster from the introduction of the 35-hour work week. They were hugely disappointed when it didn’t occur,” he added.

Mr Baker, who has also written for the New York Times and Washington Post, said: “It really is a case of economists being biased towards policies that benefit the wealthy. Also there is a hierarchy in the profession that tends to push economists in a conservative direction. With most of the leading lights joining the France-bashing, few less established economists want to stick their necks out. It’s a high risk, low reward position, even if it might be the one dictated by the evidence.”

Dr Chris Bickerton, who lectures at Queens’ College, Cambridge but has also taught at Sciences Po in Paris, said the lack of a cohesive economic plan made it very difficult for economists to support France on the whole.

“You don’t find France being defended against its critics because there is no French model,” he said.

“There are a lot of people who would agree with certain bits of a position. But when it comes to supporting France out and out, that’s where the problem lies.”

While voices like Paul Krugman defended France’s decision to raise taxes, the article had not touched on unemployment “a major social problem which has lots of ramifications,” he said.

“The government does talk about it, but they have not really done anything about it.”

While France had carried out economic reforms since the 1980s, such as privatising large industries, this has not been comprehensive.

Thus France receives neither the support of those who champion the high tax, socialist economies of Scandinavia, nor those who support laissez-faire, market-driven economies. It continues to buck economic orthodoxies.

Prof Bickerton denied there was an anti-France or conservative clique in the heart of the profession.

“Economists reflect society at large. Politics has shifted to the right over the last few years quite dramatically. France has seen that effect. Economists are just citizens who reflect these changes. We’re not always particularly left or right wing,” he said.

However, he said: “There’s a certain conviction that something must be wrong in France. That people [there] don’t realise it,” he said, adding: “There’s never quite enough, it always seems to be just around the corner.”

Dr Bickerton was interviewed for The Economist ‘time-bomb’ article, but did not agree with the magazine’s front page. “It’s not a ticking time-bomb. There’s no real reason why it should suddenly become a dramatic crisis. It’s a slow effect.”

“France needs to improve the competitiveness of its exports and to do that it needs to reduce labour costs,” he said.

“In France there’s a degree of arrogance based on its public services, history, investment in infrastructure. That’s true up to a point: but France is not a particularly dynamic economy. It can’t get people into work,” he added.

France has found itself at a disadvantage against Germany, whose workforce is comparatively cheaper and whose exports are undercutting France. The detrimental effects of Germany’s cheap exports and workforce were criticised in September by the social economy minister Benoît Hamon, but last month the EU Commission said it is examining it as a potential problem for the Eurozone.

Professor Wendy Carlin, a professor of economics at University College London, denied the existence of an anti-France sentiment amongst economists. She said: “It’s not an anti-France sentiment. It may be concern about the sustainability of the various aspects of what you might think of as the French model.”

She, too, said France’s economy could not be pigeon-holed as it lay somewhere between those of ‘northern Europe’ (Germany, Netherlands, Belgium) and ‘southern Europe’ (Italy, Spain, Portugal). “It’s not clear into which group it falls, it shares characteristics of both.” Part of the problem for France lay in its relationship with Germany and the Eurozone. “It will find it difficult to live in a common currency area with Germany,” she added.

The criticism was based on the lack of dynamism in the economy, not an ideological attack on high taxes. “People look at Scandinavian countries and argue that they work very well although they have high tax rates,” she said.

France needed to find its modern-day strengths and work on them. “It used to be very good at some industries for large-scale economies: aerospace industries, nuclear power. Some of those strengths remain, but it would seem that’s not enough.

“It’s a question of using your competitive advantage and selling things to other people – and if you cannot, your country will get poorer, it’s a fact of life.”
Photo: Prolineserver

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