After Greece: Austerity Comes to France

America’s interest in Europe’s fiscal problems seems to have ended with last month’s election in Greece. When the Mediterranean nation voted for status quo rather than to turn their country into a European Venezuela, America seems to have decided that there was nothing more to see there. This is a big mistake, for a variety of reasons – one being that Europe is still fighting the already-lost battle to save its welfare state. We should continue to pay close attention to what is happening in Europe: our own deep fiscal problems are bringing us closer and closer to a point where we have no choice but to follow Europe down the road of austerity.

Since Greece might be considered yesterday’s news, let’s take a fresh look at France. The EU Observer explains:

The French government will have to find €43bn in order to bring the country’s deficit in line with EU rules by 2013, a fresh report has shown. A report on state finances by the national Court of Auditors said Paris will need to find up to €10bn this year and €33bn next year to reduce its budget deficit to 4.5 percent of GDP and then 3 percent of GDP. “The situation remains extremely worrying,” court president Didier Migaud told Le Monde newspaper, referring to the state of the country’s public finances. When asked how the money for 2013 will be found Migaud said “with more rigour.”

For us who prefer English, this means “austerity”. In other words…

“In health, education, vocational training for example, France spends much more than other countries. But their results in these areas are significantly better than ours.” “It is better to make efforts now than have them imposed by others tomorrow,” Migaud added.

If Mr. Migaud was referring to the results from private-sector provision of health care, vocational training and education, then he would be right. But he is not. His objects of comparison are other welfare states, and when he refers to results he is simply focusing on the ratio between the number of people who obtain a service and the money you spend. This ratio is too often mistaken for some kind of productivity measure, but all it shows is, e.g., how many patients a doctor could see in one hour. Whether or not he actually cured them is a matter of output efficiency, where Europe’s welfare states rank fare very poorly.

Cutting spending while maintaining government monopolies is a bad combination. It erodes the quality of the services that people get for their tax money and deprives them of the right to seek other, privately provided alternatives. The hallmark of austerity, in short.

Now, if anyone thought that the French government was going to listen to these points, they are sorely mistaken. Let’s not forget that French voters just elected a socialist for president and a socialist majority in their national parliament. The only thing to expect from them is more of the same. Alas, the EU Observer continues:

The large sums are set to test Socialist President Francois Hollande’s skills of persuasion. He was elected in May on an anti-austerity ticket – although he always maintained that he would stick to France’s deficit-cutting promises. But the report also shows that the battle will be even harder than expected – and some form of austerity will be needed. The auditors suggested next year’s economic growth will be 1 percent, well short of the 1.7 percent predicted by the previous government while public debt is set to reach 90 percent of GDP by the end of the year – a level economists say affects growth. Under EU rules, countries have to keep their debt below 60 percent.

The French government is rapidly running out of other people’s money. The socialists knew this going in – they knew their welfare state was verging on fiscal collapse, and still they made their reckless spending promises. Their pledge to try to save the welfare state by spending even more money was politically foolish, and any economist who lent his credentials to their plan should be tried for macroeconomic malpractice. The only thing that will come out of the French government over the next few years is the same old austerity as before. The EU Observer again:

Meanwhile measures agreed after 6 May, the cut off point for the report were not included in the assessment – such as the decision to raise the minimum wage or France’s share in bailing out Spain’s banks. “It will require unprecedented cuts to public spending as well as increases in taxation,” said Migaud.

Almost a pinpoint definition of austerity, the very same policies that have not saved Greece or Spain and that have not saved France either, so far.

The eternal fiscal truth still stands: when you cut spending, you have to make clear why you are doing it. Are you cutting spending to save the welfare state, or to eliminate it? If you are trying to save it, you will go down the long downward slope of austerity, straight into the Greek dungeon.

If on the other hand you choose to cut spending in order to end the welfare state, the future is bright and prosperous.

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