Whilst the focus on this sceptred isle has been very much on
the shenanigans of Brexit, the rest of the continent is focused on its own
troubles. The most prominent issue, which has captured newspaper headlines
across the continent, is the wave of public unrest in France where the gilets jaunes have been demonstrating
against higher fuel taxes in particular and the rising cost of living in
general.
This reflects concerns expressed around the world that “the system” is not working for the average voter and that more of the same just won’t do. This in turn reflects a complex series of issues which have come together all at the same time to create a Gordian Knot of such complexity that no politician can reasonably be expected to resolve them. Environmental challenges, technological change and a shift in the geopolitical tectonic plates are big enough challenges on their own. Trying to deal with their implications at a time when we are still recovering from the biggest recession in 80 years magnifies their impact.
Looking more closely at the French government’s plan to raise fuel taxes, the French electorate appears to be as concerned as anyone about the problem of global warming and climate change, if opinion polling data are any guide. It is not unreasonable, therefore, for the government to conclude that consumers will appreciate that they have to pay more if they wish to continue emitting greenhouse gases in the process of burning fossil fuel. But they are not having it: Having been squeezed for so long, French voters just see this as another attack on their living standards.
Indeed, this demonstrates the problem of getting consumers to buy into the social changes which will inevitably have to come, and highlights the challenges for policy makers who have to wean the electorate away from certain types of behaviour. This requires an adjustment that people are not prepared to make – at least not now. However, history shows that although democratic societies frequently resist big changes at first, only to subsequently accept they are inevitable, this often occurs only after considerable social unrest, as anyone who lived through the Thatcher era in the UK will attest.
But there is another issue at work in France. Outside observers (such as me) look at the current French situation and realise we have been here before. The reform agenda set out by prime minister Alain Juppé in 1995 met with huge resistance and the general strike it provoked only ended when the retirement reform plan, which amongst other things eliminated the rights of railway workers to retire aged 55, was dropped. These strikes, which were the biggest public demonstrations since 1968, were repeated in 2010 when the government was again forced to modify its plans to reform public pensions. Given this experience, the initial reaction of the Macron government is understandable: Do what previous governments have done and suspend the tax changes in a bid to cool public unrest.
However, Macron has now gone much further than this. He appeared on TV on Monday promising to take the concerns of rural and suburban France more seriously, offering higher payments to pensioners and a rise in the minimum wage, all of which amount to additional outlays around €10bn. Having originally planned a budget deficit of 2.8% of GDP in 2019 – which is higher than the much-contested Italian plan – the budget minister now admits that in the absence of offsetting measures, the deficit will rise to 3.4%.
There are a couple of problems with this strategy. On the one hand, the French government has now done what many of its predecessors have done by kicking the can further down the road rather than engaging in the structural reform that Macron knows is required. This will only invite further protests when the government has to revisit the problems again, but the challenges in future will not get any easier. In addition, it gives cover to Italy’s position and will stiffen its resolve not to back down in the face of the European Commission’s fiscal concerns. Given that the EC has already started excessive deficit procedures against Italy, how does it intend to deal with France?
Against that, we could argue that European countries are once again rediscovering the joys of fiscal policy after years of wearing the hair shirt. But whilst across the euro zone as a whole the cyclically-adjusted budget deficit has averaged 1.3% of GDP over the period 2012-2017 (chart) and Germany has averaged a surplus of 0.5%, France has run a cyclically-adjusted deficit of 3.1% (versus just 1% in Italy). France is certainly less well placed than other EMU countries to provide a fiscal stimulus.
Another casualty of this policy approach will be Macron’s attempt to move Europe forward. Admittedly his fine words last year were exactly what Europe needed to hear as he attempted to prevent the EU from ossifying as the messy compromise into which it had evolved. But his words did not get a particularly good hearing on the other side of the Rhine. Given the German fixation with keeping deficits down, it is unlikely that his stock in Berlin will have risen.
Whilst there is nothing wrong with judiciously using fiscal policy to nudge the economy forward when circumstances demand, the French – and the Italians – are increasing their fiscal deficits to buy off the electorate. And it may even work for a while - after all it is voters' money. But hard choices sometimes have to be made. I have long argued that the UK has overdone the degree of austerity and I understand why Macron made his choices. But I cannot help feeling that somewhere down the line this might be a policy that backfires.
This reflects concerns expressed around the world that “the system” is not working for the average voter and that more of the same just won’t do. This in turn reflects a complex series of issues which have come together all at the same time to create a Gordian Knot of such complexity that no politician can reasonably be expected to resolve them. Environmental challenges, technological change and a shift in the geopolitical tectonic plates are big enough challenges on their own. Trying to deal with their implications at a time when we are still recovering from the biggest recession in 80 years magnifies their impact.
Looking more closely at the French government’s plan to raise fuel taxes, the French electorate appears to be as concerned as anyone about the problem of global warming and climate change, if opinion polling data are any guide. It is not unreasonable, therefore, for the government to conclude that consumers will appreciate that they have to pay more if they wish to continue emitting greenhouse gases in the process of burning fossil fuel. But they are not having it: Having been squeezed for so long, French voters just see this as another attack on their living standards.
Indeed, this demonstrates the problem of getting consumers to buy into the social changes which will inevitably have to come, and highlights the challenges for policy makers who have to wean the electorate away from certain types of behaviour. This requires an adjustment that people are not prepared to make – at least not now. However, history shows that although democratic societies frequently resist big changes at first, only to subsequently accept they are inevitable, this often occurs only after considerable social unrest, as anyone who lived through the Thatcher era in the UK will attest.
But there is another issue at work in France. Outside observers (such as me) look at the current French situation and realise we have been here before. The reform agenda set out by prime minister Alain Juppé in 1995 met with huge resistance and the general strike it provoked only ended when the retirement reform plan, which amongst other things eliminated the rights of railway workers to retire aged 55, was dropped. These strikes, which were the biggest public demonstrations since 1968, were repeated in 2010 when the government was again forced to modify its plans to reform public pensions. Given this experience, the initial reaction of the Macron government is understandable: Do what previous governments have done and suspend the tax changes in a bid to cool public unrest.
However, Macron has now gone much further than this. He appeared on TV on Monday promising to take the concerns of rural and suburban France more seriously, offering higher payments to pensioners and a rise in the minimum wage, all of which amount to additional outlays around €10bn. Having originally planned a budget deficit of 2.8% of GDP in 2019 – which is higher than the much-contested Italian plan – the budget minister now admits that in the absence of offsetting measures, the deficit will rise to 3.4%.
There are a couple of problems with this strategy. On the one hand, the French government has now done what many of its predecessors have done by kicking the can further down the road rather than engaging in the structural reform that Macron knows is required. This will only invite further protests when the government has to revisit the problems again, but the challenges in future will not get any easier. In addition, it gives cover to Italy’s position and will stiffen its resolve not to back down in the face of the European Commission’s fiscal concerns. Given that the EC has already started excessive deficit procedures against Italy, how does it intend to deal with France?
Against that, we could argue that European countries are once again rediscovering the joys of fiscal policy after years of wearing the hair shirt. But whilst across the euro zone as a whole the cyclically-adjusted budget deficit has averaged 1.3% of GDP over the period 2012-2017 (chart) and Germany has averaged a surplus of 0.5%, France has run a cyclically-adjusted deficit of 3.1% (versus just 1% in Italy). France is certainly less well placed than other EMU countries to provide a fiscal stimulus.
Another casualty of this policy approach will be Macron’s attempt to move Europe forward. Admittedly his fine words last year were exactly what Europe needed to hear as he attempted to prevent the EU from ossifying as the messy compromise into which it had evolved. But his words did not get a particularly good hearing on the other side of the Rhine. Given the German fixation with keeping deficits down, it is unlikely that his stock in Berlin will have risen.
Whilst there is nothing wrong with judiciously using fiscal policy to nudge the economy forward when circumstances demand, the French – and the Italians – are increasing their fiscal deficits to buy off the electorate. And it may even work for a while - after all it is voters' money. But hard choices sometimes have to be made. I have long argued that the UK has overdone the degree of austerity and I understand why Macron made his choices. But I cannot help feeling that somewhere down the line this might be a policy that backfires.
