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Getting Something for Nothing

A recent article by Anne-Elisabeth Moutet in the Telegraph has caught our attention, because it nicely demonstrates the corroding effect regime uncertainty has on the economy as exemplified by the situation in France. The article is entitled "Down and out: the French flee a nation in despair" and is well worth reading in its entirety.

Regime uncertainty pertains when the main focus of businessmen and other actors in the economy turns to a single question: what idiocy will the government think of next?.

In France this question has become so highly relevant that it has led to economic paralysis and a seemingly unstoppable exodus of the country's best and brightest. If this continues, only the government moochers will be left and will eventually be forced to live from hand to mouth. Ms. Moutet's article starts out by noting that even the notoriously anti-capitalistic French public currently thinks the socialist government has gone too far:

More than 70 per cent of the French feel taxes are "excessive", and 80 per cent believe the president's economic policy is "misguided" and "inefficient". This goes far beyond the tax exiles such as Gérard Depardieu, members of the Peugeot family or Chanel's owners. Worse, after decades of living in one of the most redistributive systems in western Europe, 54 per cent of the French believe that taxes - of which there have been 84 new ones in the past two years, rising from 42 per cent of GDP in 2009 to 46.3 per cent this year - now widen social inequalities instead of reducing them.

This is a noteworthy departure, in a country where the much-vaunted value of "equality" has historically been tinged with envy and resentment of the more fortunate. Less than two years ago, the most toxic accusation levied at Nicolas Sarkozy was of being "le président des riches", favouring his yacht-sailing CEO buddies with tax breaks and sweet deals. By contrast, Hollande, the bling-free candidate, was elected on a platform of increasing state spending by promising to create 60,000 teachers' jobs, as well as 150,000 subsidised entry-level public-service jobs for the long-time unemployed and the young - without providing for significant savings elsewhere.

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Hollande essentially promised his voters that they could get something for nothing. Now they are finding out that this isn't quite true. The government has no resources of its own and in France (and also other euro area economies) this fact is more easily seen than elsewhere as a side-effect of euro area membership. Ordinarily the government could create a temporary illusion of there being a fount of riches by means of inflation. It could also do this by increasing its indebtedness, but neither avenue is really available to Hollande's government. It cannot force the ECB to print it out of trouble, and due to the EU's "fiscal pact" and the ever-present threat of markets throwing a fit, it cannot increase its debt willy-nilly either. Thus the government's redistributive measures require ever higher taxes. The "free goodies" have turned out not be so free after all.

Botched Communications and the Exodus of Wealth Creators

The government's haphazard taxation policy happens to be one of the main sources of 'regime uncertainty' in France. Many new taxes are announced, or rather leaked, long before they are implemented, leading to guessing games as to who will be next on the lengthening list of victims.

On the one hand, the lacklustre economy and finance minister Pierre Moscovici recently admitted that he "understood" the French's "exasperation" with their heavy tax burden. This earned him a sharp rap on the fingers from the president and his beleaguered PM, Jean-Marc Ayrault. On the other, new taxes keep being announced, in chaotic fashion, nearly every week. "Announced" doesn't mean "implemented": the Hollande crowd have developed a unique Wile E Coyote-style of leaks, technical glitches, last-minute tweaks and horse-market bargaining whereby almost nobody knows, at any given time, who will be targeted by the taxman, and how. Unsurprisingly, this is liked by no one except us reptiles of the press, eager to report on the longest series of own goals in the history of government communications.

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Of course an improvement in communications wouldn't alter the fact that the tax burden imposed by Hollande's government is extremely onerous and seems specifically designed to punish success. The 75% 'supertax' on the rich has still not been implemented (although it seems now that the latest version of it will actually pass - it shifts the cost to employers). Nevertheless, it has produced an exodus not only of already wealthy people, but also those with initiative, people who intend to become wealthy by economic means (i.e., by serving consumers). As Ms. Moutet writes:

What we do know is that this non-existent (so far) tax has been the clincher that sent hundreds, possibly thousands of French citizens abroad: not just "the rich", whom Hollande, during his victorious campaign, said he personally "disliked", and who now are pushing up house prices in South Kensington and fighting bitterly over the Lycée Charles de Gaulle's 1,200 new places; but also the ambitious young, who feel that their own country will turn on them the minute they achieve any measure of personal success."

[…]

Today, one out of four French university graduates wants to emigrate, "and this rises to 80 per cent or 90 per cent in the case of marketable degrees", says economics professor Jacques Régniez, who teaches at both the Sorbonne and the University of New York in Prague. "In one of my finance seminars, every single French student intends to go abroad."

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The holders of marketable degrees are precisely the people France sorely needs to bring its moribund economy back up to speed. The intellectual elite has largely become a vacuous debating club pondering subjects such as the "cultural exception," how many franglish words should be allowed in official language, and whether the kibosh should be put on the free shipping of books by online firms to protect their more inefficient competition at the expense of consumers (free shipping has actually recently been outlawed).

Institutional Unemployment

Ms. Moutet quotes a headhunter who notes that there are two kinds of people now among the youth in France; those who actually want to achieve something and are increasingly trying their luck abroad, and those who pine for an existence as government-employed vegetables - not making much money, but secure and not forced to deliver anything in terms of job performance:

"But I've also seen determined young people take jobs in places like Vietnam, with local contracts and nothing like the level of protection afforded by French labour law, in order to gain a proper first experience of business in a competitive environment. And then you have a large group whose ambition is simply to stay outside the economy."

This means a trade-off with which anyone in France is familiar: young people, and many of their parents, dream of getting any kind of state or local administration post, usually badly paid, very often frustrating, but which ensures complete job security, unrelated to the economic situation, the market, or their own performance.

More than a quarter of the French workforce is employed by some public body or other: schools, hospitals, local and regional councils, the police, the civil service proper - or those new subsidized public-service jobs the Hollande government is so keen on.

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With a quarter of the population employed by the wealth-consuming public sector it is no wonder the economy is in a kind of perpetual slump. Note that the unemployment rates achieved in France during boom times are at the same levels that cause the Fed to maintain its current massive rate of monetary pumping.

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France's unemployment rate since 1996. At the height of an unsustainable economic boom it fell to a low of 7.5% - a level the U.S. authorities consider completely unacceptable. And yet, it is the best the French economy can do - click to enlarge.

France's economic policies, especially its labor laws, are a guarantee for extremely high institutional unemployment. One often gets the impression that President Hollande and his government colleagues seem convinced that economic laws can be suspended by legislative fiat. This is not the case. It is noteworthy how by how much labor costs have increased in France over time:

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French labor costs - a one-way street in the wrong direction

The utter cluelessness of French government officials was on stark display when a long time aide to Mr. Hollande, Stéphane Le Foll, recently discussed France's trade deficit with Germany in agricultural products:

France had been adversely affected "by competition from Germany, which is unfair competition because Germany does not have a minimum wage and we do. That is a problem," he said.

In other words, it's all Germany's fault for being more efficient and actually not burdening its labor market with minimum wages (which are a major reason for France's permanently high unemployment rate). As an aside to this, it seems that the looming 'grand coalition' between Mrs. Merkel's CDU/CSU faction and the socialists in Germany will bring relief on that front, as the German socialists have made a minimum wage a sine qua non condition for their participation. All workers in Germany whose skills are valued at less than the minimum wage in the market will then become forever unemployed, and the socialists will trumpet what great strides for social justice they have achieved.

Unions and Cynical Power Politics

France's unions are very small - if they had to survive solely on membership dues, they would likely be completely gone by now. However, their power is enshrined by law, which has extremely unfortunate consequences for the economy at large, including the workers unions are supposed to represent and protect:

French unions see as their main goal the preservation of the status quo: from overprotective labour laws that make it so hard to fire employees that French bosses will do almost anything to avoid hiring new staff (who cost them a whopping 70 per cent in payroll taxes), to perpetuating antiquated regulations dating back to Vichy France, banning Sunday trading and evening shifts.

Recent union legal actions have forced businesses to close on evenings and Sundays, from the cosmetics chain Sephora - where employees protested that they wanted to keep working their late hours - to the British-owned DIY chain Castorama, which belongs to Kingfisher: no wonder Ian Cheshire, Kingfisher's chief executive, complained last Friday that this harmed the French economy as well as his stores. "The president has said that recovery is in sight: I'm not sure where he's looking at the moment."

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It is downright absurd that the wishes of employees are blithely disregarded by the unions. As for Mr. Hollande, he is just hoping that some deus ex machina will come to the economy's aid - other than that, he is a cynic who calculates that he will remain in power no matter what, due to electoral arithmetic. Besides, no French government has dared to confront the vested interests that stand in the way of reform since Chirac's time - and that was in the mid 1990s. Even mild reform attempts have lost elections for those attempting them. Elections are after all 'advance auctions of stolen goods' as Mencken so sagely remarked, and necessary, but unpopular reforms are a tough sell:

An investment banker, who has also moved to London recently, dates the wrong choices from the first Jacques Chirac presidency, in 1995. Chirac and his PM Alain Juppé, both Gaullists, decided to reform the huge French public sector's pension system, to align civil servants' pay-as-you-go pensions, which were (and still are) much more favourable, with those of the private sector.

There followed three weeks of hard strikes, shutting down the entire country, from schools to public transport to utilities and the post office. Juppé was ready to stick it out, but Chirac blinked. The reform was shelved, and for the next 12 years he stayed in office, Chirac never, ever tried to clash with vested interests again.

Sarkozy had great plans after his 2007 election. He believed in business, and good pay for hard work, and was devastatingly frank about it. It might - perhaps - have passed in prosperous times: one year on, the financial crisis hit, and his brusque style and love of bling clashed with both the times and age-old French preferences. (France is an old Catholic country that, for over a century, was influenced by unapologetic Marxism. It is atavistically hostile to money.) The reforms Sarko managed to pass, much milder than necessary, still ensured his unpopularity. He bet on French realism, and lost.

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Recent polls may indicate that the French public is quite exasperated with Mr. Hollande's government, but one might well say that it got precisely the president it deserved. If you are influenced by an 'unapologetic Marxism' and are 'atavistically hostile to money', you cannot hope for prosperity to just fall into your lap. Here is how Ms. Moutet characterizes Mr. Hollande and describes his cynicism and political opportunism:

France's unlikely seventh president of the Fifth Republic is a professional politician, a graduate of the top government school ENA, and has never held a job in the private sector. Both Chirac and Hollande come from Corrèze, in central France, a region that has regularly provided French politics with a certain type of wily opportunist. Both appear easy-going and friendly, and both are complete cynics, with very little in the way of ideals, and an infinite capacity to scheme in order to stay in power.

Chirac, like Hollande, knew how to cultivate an array of political allies: in the case of Hollande, this means keeping the Left of his party as well as his Green allies happy with a number of symbolic measures, from the supertax to the recent anti-fracking bill.

Uninterested in the impact of morale and image on politics and the economy, Hollande believes that the economic cycle is bound to turn (he has said several times already that the recession is behind us), and that all he's got to do is stay in power until things get better - thanks to the Chinese, the Americans, it hardly matters which. He doesn't even worry about Marine Le Pen's inroads in local elections: a junior aide in the Mitterrand Élysée 25 years ago, he believes the National Front, conjured up by his old boss, is a convenient accessory designed to split the Right and help him win a second term in 2017.

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It is barely imaginable that France can make it intact through six years of a Hollande administration, never mind 12 years. However, we don't doubt that the above characterization of Mr. Hollande is 100% correct. He hopes that an economic upswing in the rest of the world will pull France along, just enough to allow him to crow about an improving economy in due time. And even if that doesn't happen, he still hopes that the FN will mostly attract voters from the right, allowing him to win another term anyway.

Of course, that may well turn out to be a miscalculation. The FN's economic policies consist of the same mercantilist and protectionist nonsense Mr. Hollande stands for. It may well prove to be attractive to traditional working class socialist voters who share its disdain for immigrants, in which case Mr. Hollande could find himself out of a job in 2017. Whether his successor will be any better in terms of his ability and/or willingness to push through long overdue reforms remains to be seen (we are actually doubtful on that score).

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France's industrial production - what upswing?

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French consumer confidence has recently improved from "totally terrible" to "slightly less totally terrible."

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The always slightly befuddled looking French president cultivates the image of a friendly uncle. He is in reality a cynical power-hungry bureaucrat-politician. It is not certain whether he is really as economically illiterate as he appears or if his policies are solely designed to keep his power-base happy, but probably it is a mixture of both.

Charts by: Tradingeconomics

Source: Regime Uncertainty In France