The French presidential election is of enormous importance, as the next president’s policies will have huge repercussions for Europe, especially for the euro. If there were to be huge turmoils in Europe, that will affect us all, within, without and beyond the eurozone, hence this election is of global importance, not because France is la grande nation of hegemonic proportions, but because France is large enough, and perhaps selfish enough, to bring chaos to Europe. The French figures for government spending, revenue and deficit do not inspire confidence, as will be seen below, and combined with the political discourse, they are raising concerns in the markets and in other European countries.
If Mr Hollande, who is leading in the polls, were to be elected, a shift from policies of austerity to policies of fiscal expansion might ensue in France, which the markets and other states would interpret as an abandonment of the policy of fiscal discipline that was agreed among the eurozone countries. While Mr Hollande may receive support from the likes of Greece, it will meet a determined opposition from Germany, and probably from other states which have implemented measure to reduce the deficit. Peoples of Ireland, Greece, Spain, Portugal and Italy, but also in other countries, have endured, often under protest, severe spending cuts, and while the deficit problems remain and the economy is sliding back into recession, the deficit figures have been coming down noticeably since the heights reached in 2009 for many European countries.
As mentioned numerous times before, I don’t really understand economics, but basically, a deficit occurs when the government spends more than the taxman collects. If a state is heavily indebted, then the taxman collects to repay the debt and interests, rather than pay for investments or social security. Deficits lead to debts, and debts can make deficits worse, since more money will be needed to repay the debts, unless the government takes more from the people, or spends less.
Looking at the 2011 figures, France had a deficit-to-GDP ratio of 5.2%, when the eurozone average was 4.1%. Ireland (13.1%), Greece (9.1%), Spain (8.5%), Slovenia (6.4%) and Cyprus (6.3%) had worse figures, and incidentally the figure for the UK was 8.3%, but the French figure was much higher than Germany (1.0%) and higher than Italy (3.9%). In other words, the French state is spending more than it collects in revenue, and it has not decided how to balance the books: spending cuts, or raising taxes. The French government took 50.7% of the GDP, but its spending accounted for 55.9% of the GDP. This figure of 55.9% is the second highest in the EU, after Denmark, and above the EU average of 49.1%.
In Denmark, Sweden and Finland, for example, the government spends a lot, but then the government receives a lot. Denmark was running a deficit of 1.8% in 2011, Sweden had a surplus of 0.3%, and Finland a deficit of 0.5%. In Denmark, the government spending accounted for 57.9% of the GDP, but it also collected 56.0% of the GDP. Figures for the two other Nordic states tell the same story: Swedish government’s spending accounted for 51.3% of the GDP, but it collected 51.4%; for Finland, the figures were 54.0% and 53.2%. It can be said that France spends as if it is a Nordic country, but without collecting the corresponding revenue.
Elsewhere, some governments collect less, and spend less. This is, in other words, the Anglo-Saxon model: the lower the taxes are, the more incentives there are for the private sector to generate growth. Ireland, for example, attracted investments by a low-tax regime. In 2011, the government revenue accounted for 35.7% of the GDP in Ireland. The problem, naturally, was that its spending accounted for 48.7% of the GDP, running a 13.1% deficit. The figures for Spain are similar: the government revenue was 35.1% of the GDP, the government spending 43.6% of the GDP, and a deficit-to-GDP ratio of 8.5%. Most former communist countries in east, east-central and south-eastern Europe tend to have small states, compared to old Europe. France is unlikely to be a low-spending country, and the French probably accept a higher tax burden than in these countries.
Perhaps France should look towards Germany, at least in terms of the balance between the state’s receipts and spending, and by extension, reforms of the social welfare system and the economic structure. In Germany, the government revenue accounted for 44.7% of the GDP in 2011, and the government spending accounted for 45.6%, running a very modest deficit of 1.0%. Germany has made structural reforms, which have not been painless, and it coped with the aftermath of the reunification, over the past two decades. France is in need of structural reforms, but it does not have to contend with anything of the magnitude of German reunification. Because of its reforms, and despite criticisms directed at them for being too much or too little, Germany has remained economically competitive and has been weathering the storm pretty well compared to most other economies.
I may have been wrong in the predictions I made in an article titled Europe: shift to expansionary fiscal policy?, in that I thought the shift to policies of fiscal expansion would come after there was confidence that structural debt was under (some sort of) control. If this turn were to happen now, rather than when there is confidence that fiscal discipline is in place, it will spook the markets, and the euro and the world economy will be in deeper jeopardy.
Given the figures quoted above, I doubt Mr Hollande, if he were to win, has much of a room for manoeuvre, especially as the size of the state in France is already very large. Mr Hollande’s tone will be different from that of Mr Sarkozy, but the fundamental structural problems in France remain, and if he wants France to spend its way out of the current economic stagnation, he will have to demonstrate that the French government is ready to make reforms so that it can balance the books, or at least it is prepared to generate revenue to cover the costs.
Austerity is unpopular, and Mr Hollande may think that his message would be popular in France and in Europe, however, there is a possibility that other European states and peoples will take a very dim view of French fiscal indiscipline, especially after they had made the necessary sacrifices to bring down the deficit for the greater good of the euro and Europe. The fiscal indiscipline of the monarchy was arguably one of the most crucial reasons for the French Revolution. Could the current French fiscal indiscipline lead to the fall of the euro and the EU? That would be rather far-fetched.