“You shall not crucify mankind upon a croissant d’or.”
That was the economist Alan Taylor’s response (in correspondence) to French President François Hollande’s embrace of Say’s Law – Mr. Hollande literally said that “supply actually creates demand” in a press conference – together with his shift to, again in his own words, supply-side policies.
The amazing thing to me, aside from Mr. Hollande’s haplessness, is the extreme pessimism that has evidently enveloped the French elite. You’d think that France was a disaster area. Yet the numbers, while not good, just aren’t that dramatic.
Start with growth since the crisis. How does France stack up in the European context? It doesn’t perform as well as Germany, obviously. But if you compare it with other European countries – even if you leave out the troubled debtors – it doesn’t stand out as a poor performer.
What about declining competitiveness? It’s true that France has consistently run current account deficits in recent years, but they’re quite small. And France’s fiscal outlook doesn’t look at all worrying, except to the extent that it has slashed its structural deficit too much in the face of economic weakness.
Bond markets, which panicked during the worst of the euro crisis, don’t seem very worried at this point. Now, French performance has definitely been weak in recent quarters. But why? The economist Francesco Saraceno argues, using survey evidence, that the problem is demand, not supply. Inflation data also supports this view.
France, like much of Europe, seems to be flirting with deflation and very much at risk of falling into a scenario similar to that of Japan. Oh, and while an International Monetary Fund report on this topic tries to place some weight on “uncertainty,” the conclusion is still that austerity policies are a large part of the story. Again, things aren’t good.
But you do have to wonder why the French elites are so easily intimidated into making a hard right turn while in much worse cases like Finland and the Netherlands, the elites remain steadfast in their notion that the worse things get, the more committed they have to be to inflicting further pain.
The Glittering Crises
Many people have pointed out that the euro system has ended up functioning a lot like the gold standard – and in so doing has replicated the “gold fetters” that many economic historians say played a big role in the propagation of the Great Depression. Among other things, this whole discussion has ushered in, um, a golden age for economic history: I can’t think of a time when history has been as useful as a guide to current events (and current action, if only policymakers would listen) as it has since 2008.
And the historians still have more to teach us. In a recent article in The Economist, the Oxford economist Kevin O’Rourke revisited the gold standard in its pre-1914 heyday, and pointed out that even under the favorable conditions of the day, the system only worked even passably well during periods of inflation. This is, as he wrote, all the more reason that leaders in the euro zone should be deeply alarmed about the slide toward overall deflation.
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