The French Presidential Election and the Future of Europe

~ Frederic Sautet ~

François Hollande, the French President-elect, has the usual pedigree of a French politician: he studied at ENA, which is the school where senior officials are trained, and has spent all is life in politics as mayor of Tulle, president of the General Council of his region, and delegate (member of the National Assembly). He is also a former head of the French Socialist Party. The Socialist Party in France is
not quite like Labour in Australia, New Zealand, or the UK. While it has rejected the old quasi-Marxist views and has distanced itself a bit from some other parties of the left (which include communists, Trotskyists, and others), the Socialist Party has not completely updated its priors. Many members, such as Arnaud Montebourg (who was third in the primaries), are in favor of “de-globalization” and “cooperative capitalism” in which the means of production are in the hands of the workers who are leading the world towards a green (industrial) revolution. Amidst all this, Hollande is seen as a “moderate,” but let's not forget that he won with the help of the hard core left, especially Jean-Luc Mélenchon’s “Front de Gauche”, which includes the Workers’ Communist Party of France and other smaller movements.

A few things are important to mention here. First, as I stated above, Hollande has the right pedigree; he’s an insider. This is very important if we consider that economic reforms are often the result of the combination of two factors: (a) the arrival of outsiders who have no interest in maintaining the status quo and (b) an external event such as an uncontrollable crisis that gives outsiders a chance to implement reforms. The crisis is almost present but the outsiders aren’t (I say “almost” because it is probably not enough yet, once the French state is in default, then we’ll have a real crisis). Hollande has clearly stated that he will do all he can to maintain and reinforce the status quo. He wants to do away with the so-called austerity measures and help all the victims of financial markets. This means that social transfers (including retirement pensions) that represent more than 45% of total government spending in France (around €500b) are bound to increase.

Second, the election of Hollande illustrates the disconnect that exists between the reality of the economic situation in France and Europe, and the beliefs that people hold about what needs to be done. This shows to me that there is a lot of truth in Bryan Caplan’s thesis on the role of voters’ preferences in selecting bad policy outcomes. France boasts a level of public spending of 56% of GDP and a fairly rigid economy (it ranks 67th on the Heritage-WSJ index of economic freedom). Official unemployment has been on average more than 2.5% above that of the US in the last 20 years. Poverty is on the rise (and was already rising way before the crisis) and depending on how one defines it, it may represent up to 10% of the entire population. Public debt (as defined by Maastricht) is around 80% of GDP, but taking unfunded liability into account would push the level well above 100%. The public deficit is widening (the state needs to raise €180b in 2012 and €200b in 2013) and is threatening to become unmanageable (France has already lost its triple-A rating and the cost of debt could skyrocket in the future reducing the government’s margin of error even more). The same is true with many other European countries. EU members have had high unemployment on average (especially youth unemployment which is above 20%) for more than two decades, several states that are now on the verge of being in default, and the banking system is desperate to reduce its bad loans. With a few exceptions, such as Sweden (which started cleaning up its fiscal situation more than ten years ago), Europe is in a complete state of mess and the French socialists want to press even harder on the accelerator (and thus go against the German goal to be fiscally more conservative).

Western economies have gone through many crises and recovered in the last two hundred years but it’s hard not to think that nations rise but also fall. As Raghuram Rajan recently stated (here), the West cannot borrow and spend its way to recovery ad infinitum. Keynesian solutions never worked but they had lesser consequences when total government spending and the tax take were below 35% of GDP as it was in Europe prior to 1970. Things are different now. The last forty years have witnessed the explosion of social transfers (and other government spending), the increasing regulation of the labor and other markets, and massive fiscal imbalances in most European countries (France hasn’t had a surplus since 1974). The countries that have put their fiscal houses in order such as Australia, Canada, New Zealand, and Sweden have weathered the current crisis well (or at least better than most other OECD countries). Voters ignore these lessons at their peril. I did not approve of Sarkozy’s policies (he failed on almost all accounts and his loss is largely due to his failure to reform, see here) but it's hard to see what's good in Hollande's program. If he keeps his campaign promises the consequences for France and Europe will be dire.

If the French left wins the legislative elections in June, it will face a sort of winner’s curse: a left wing president, left wing National Assembly and Senate, left wing regional governments, and possibly a majority of left wing municipal governments. Pretty much every elected office in France will be in the hands of the left. What will the left do with all that political power? Only time will tell, but if they fail, they will have no one to blame but themselves.

Comments

[Daniel Klein]

Nice post, thanks Fred.

[Richard Ebeling]

Very useful and insightful.

The core problem in all of these European countries is the poliitcal-philosophic underpinnings of social thinking.

That is, the underlying assumption is that liberal capitalism is exploitive, unfair, destabilizing, and fundamentally unjust and immoral.

In other words, the "default position" is that "Marx was right" -- in his critique of capitalist society.

Only the paternalistic (left-leaning) state can assure that everyone gets what they rightly deserve and "need" for a decent life, including a stable and secure job, and that those who unfairly ("exploitively expropriated") wealth they have not earned should have those ill-gotten gains taxed away (say, with a 75 percent income tax, as Hollande as proposed) so the remainder of the society may have the social securities and justice they right deserve.

Until this mind-set is changed, any "cuts" in government spending and redistributive largess (and some analysts such as de Rugy have recently shown that in reality no "austerity" has been imposed -- merely a decrease in the rates of increase in most of these countries) once the "crisis" seems to pass or deminish, we will see an attempted return to the same programs and policies of the past.

The reason is that no one "overthere" in Europe thinks that there is anything fundamentally wrong wiith the assumptions or the practiices of the interventionist-welfare state. It is just a "funding problem" for which there must be some solution, so the journey on to the bright and beautiful "progressive" future may be continued.

Richard Ebeling

[Mario Rizzo]

Good to hear from you again, Frederic. It is a bad world when we have to hope that politicians will not keep their promises. I do think that if Angela Merkel hangs tough she will do the French a favor.

[Nicholas]

It is good that you have posted again.

I agree entirely. France is in trouble. Even more trouble than it was in under Sarkozy.

As Englishmen who can't speak French properly say, "le merde is going to hit le fan".

[Charles Rowley]

Political outcomes in France, as elsewhere in the eurozone, are now largely irrelevant. Bond market vigilantes control policy. Already the Greek elections are raising bond yields in Portugal, Italy and Spain as well as in haplass Greece. The moment that Hollande opens his socialist mouth the bond market will kick France heavily in its economic derriere.

Francois Mitterand all over again, though I suspect that Hollande has the common sense not even to try.

Thank Heaven for the bond markets. They hold democratic fiscal excesses in check.

[Renaud Fillieule]

Very good summary, thank you. Quite worrying situation here in France: not yet a word from the new president and the Left on what they are going to do to reduce the public debt...

[Jerry O'Driscoll]

I add my applause for the post and encourage Frederic to post more on this and other topics.

Contrary to Charles, I think the bond markets have been behind the curve from the get-go. They still are. All talk of solutions in the critical countries is just that: talk.

Watch the Irish referendum on May 31st. Spain has not adequately addressed its problems. Ditto Italy. Both are too big to fail and too big to bailout.

Japan is now in a class by itself with respect to public debt, and the factors that enabled it to handle its debt in the past are moving in the wrong direction.

Then there is the U.S.

[nickik]

Hi, nice article, thx.

I from Switzerland and I would like to hear an outsiders opinion on Switzerlands economic situation. What do you guys think? The inside perspective is always diffrent from the outside one.

[Joh]

nicki,

What's your insider's perspective on Switzerland? =)

[McKinney]

They've lost those bourgeois values.

[Jim]

It has been disheartening to watch the French and British self-infliction of the last 30 years, resulting in slides in living standard and pride.

It is sad to think a continent that crawled out of the mud only a few centuries ago, who withstood famine, war and atrocity, should now slide back into poverty because of unwarranted guilt caused by a self-destructive cultural meme which was never true in the first place.

America is now following at break neck speed, although we actually had demonstrations calling for a halt to government spending.

[K Sralla]

It has been a facinating journey to live and work in Europe during this time. One of the most striking empirical examples is working in Spain. As one drives across Spain, almost everywhere one comes across half-finished, now abandoned public works and infrastructure projects, invariably with half fallen over signs in front bragging about the funding.

So many of these projects are literally roads and bridges to nowhere. In one little town there is an abandoned mine. About five years ago all this public funding began turning the mine into a "tourist attraction". After cost overruns, the money ran out, and now there are half-finished concrete bunkers, and light stands with rolls and rolls of wiring laying abandoned on the ground. The money ran out, and now the whole thing lays in ruins.

In breathtaking abundance across Spain, there are beautiful carreteras built with no cars or trucks that travel over them. There are excersize facilities and walkpaths which nobody ever uses. It is breathtaking Keynesianism in all its glory. Now, all these "investments" are left unfinished with no hope of ever yielding any public return. None of the loan is now able to be paid back out of any return on the investment. This is truly how government waste makes a nation poorer. It matters not whether this is financed internally or externally, this kind of Keynesianism mixed with European style "grassroots democracy" (las autonomas de Espana) impoverishes nations.

It is hard to forsee how all these systematic public mal-investements driven by a credit boom directed into the public sector ever get papered over. Someone must take the haircut since there is no hope of reducing the staggering debt levels without some serious inflation or short of banks that are too big to fail going under.

[Mario Rizzo]

Dr. O'Driscoll criticizes the bond market???!!!! Why I thought that they had perfect knowledge or something like that!

[Jim Rose]

The real French election takes place on 10 and 17 June to elect the National Assembly from 577 single member electorates

The only real power of the French president is to dissolve the national assembly.

Since only the French National Assembly has the power to dismiss the French Prime Minister, the president is forced to name a prime minister who commands the support of a majority in the national assembly.

When the majority of the Assembly has opposite political views to that of the president, this leads to political cohabitation.

In that case, the president’s power is diminished, since much of the de facto presidential power relies on a supportive prime minister and National Assembly, and is not directly attributed to the post of president.

the presidential election was close. the socialists need to win 103 more seats for a majority. only the three major parties have seats. co-habitation is possible.

the New Centre party will most likely hold the balance of power in the national assembly. already has 22 seats. that party supports social welfare and a competitive market economy.

[Jim Rose]

On the recent left-ward drift after the recent right-ward drift in the EU, remember Posner and his rehabilitation of Schumpeter theory of democracy:
- Elections vote parties out rather than vote parties in;
- Voting is mainly retrospective rather than prospective.

Schumpeter disputed that democracy was a process by which the electorate identified the common good, and that politicians carried this out:
• The people’s ignorance and superficiality meant that they were manipulated by politicians who set the agenda.

• Although periodic votes legitimise governments and keep them accountable, the policy program is very much seen as their own and not that of the people and the participatory role for individuals is usually severely limited.

Schumpeter’s theory of democratic participation is voters have the ability to replace political leaders through periodic elections.

Citizens do have sufficient knowledge and sophistication to vote out leaders who are performing poorly or contrary to the electoral majority’s wishes.

Democracy is not a deliberative process, in the sense that voters examine and discuss issues and so formulate a thoughtful, knowledgeable opinion on what policies are right for the nation or for them.

Voters have neither the time, the education, nor the inclination for such an activity - all they know is results.

So if the Right fails as it did in France to deliver on its promises, the Left takes over, whether or not it has better or even different policies.

Leftist governments are intelligent enough to understand that they can benefit their constituents more by adopting capitalist policies while employing leftist populist rhetoric to satisfy voters’ emotional commitments

[Jerry O'Driscoll]

The French President is very powerful. He has complete competence in foreign policy. Cohabitation crimps him in domestic policy: Mitterand and Chirac (1983-87).

There is no political "right" party in Europe as we would understand it in the US. There is, however, no net leftward drift in Europe. The Center-right Popular Party was victorious in Spain and has a solid majority. Their principal policy is to raise taxes.

Berlusconi and Sarkozy were faux-conservatives who promised reforms and did not deliver. They were fired by the voters for non-performance. The voters understand whether politicians's actions match their words. That is rational, not emotive.

[Jim Rose]

thanks jerry, the prime minister controls the legislative agenda and the president's powers are limited to foreign policy and defence.

France was governed under a cohabitation of leaders for almost half the period from 1986-2006, suggesting that French people no longer fear the prospect of having two parties share power.

[Jim Rose]

jerry, I should add that Jospin served as Prime Minister during France's third cohabitation government under President Jacques Chirac from 1997 to 2002.

Despite his previous image as a rigid socialist, Jospin went on selling state-owned enterprises, and lowered the VAT rate, income tax and company tax.

His government also introduced the 35-hour work week and provided additional health insurance for those on the lowest incomes through the creation of CMU.

He was rewarded with third place in the 2002 presidential election behind La Pen.

[Charles Rowley]

I agree that the bond market is behind the curve. Adaptive rather than rational expectations is the more relevant model. But being behind the curve does not imply irrelevance. The PIIGS are in trouble because of the bond market. And France will be in trouble if it loosens the already slack fiscal corset, given its debt problem. Britain is more protected because it is imposing austerity measures as is Germany.

As for the US? Well that beggars belief. How long will the bond market ignore the unsustainable debt trend? I do not know. But I would not purchase 10-year US Treasuries at this time!

[Olivier Braun]

Dr. O'Driscoll and Jim Rose are, I would say, both right.

According to the Constitution, the prime minister, who depends on the majority in the National assembly, directs all the activity of the government, including foreign affairs and defence. But the president was granted in time of crises extraordinary powers (virtual dictator, but under conditions and some controls) by article 16, and is also the commander in chief of the army (art 15). The president have also the prestige power of being elected by universal suffrage, the prime minister not (and he is appointed by the president, and the president appoints the members of the government as proposed by the prime minister. If the person chosen for foreign affairs and defence do not please him the president can, and did in Mitterrant's time, refuse the appointment).

The competence in foreign affairs and defence (in french we talk about “domaine réservé” rests on 3 points :
extraordinary powers (and sole right to launch atomic bomb)
political institutions : the president is (was) the chief majoritarian party
history : foreign affairs and defence were the main interests of the fifth republic's first president, the général de Gaulle. And that started a strong tradition, and the voters expect also for the president a dominating role.
So in case of cohabitation, the government has exclusive control of domestic affairs, and, in foreign affairs, there is a kind of cooperation between the president and the government. If the president has a strong personality and is willing to confront the prime minister, he can have quite a directing role.

[Jim Rose]

thanks Olivier, if there is cohabitation, I do not know who will go to the heads of government meetings at the EU.

Chirac experinced cohabitaion as PM and then as president.

Chirac mostly handled domestic policy while Mitterrand concentrated on his reserved domain of foreign affairs and defence.

Conflicts did erupt between the two. In one example, Mitterrand refused to sign executive decrees of liberalization, obliging Chirac to pass the measures through parliament instead.

[Olivier Braun]

Yes, Jim, I remember that problem in the beginning of the cohabitation in 1986. Chirac wanted to go fast and asked the parliament the right to take "Ordonnances" in the domain of competence of Parliament - a kind of Law-decree - and the constitution says that the President "signs" the decrees. But though it is interpreted as an imperative, Mitterrand refused nevertheless. Chirac didn't want to risk a clash who could backfire (but after all, he lost his presidential buid in 1988).

As for the international summits, it happened that they both attended, which was strange. But it is the point of view of the prime minister who shall prevail, but there would be a real cooperation in important matters. After all, every act of the president have to be signed by a member of the government. But I don't think there will be a cohabitation. By the way, remember that the Constitution was changed during Chirac's second term, to limit the presidential term from 7 to 5 years, same duration as the National assembly. And the far-right (well, kind of leftist in some economic policy positions) Front National will prevent Sarkozy's party, the UMP to have any real chance of winning despite Hollande's victory.

[FDominicus]

"Only time will tell, but if they fail, they will have no one to blame but themselves."

You can bet they will find a scape goat. That socialists will fail in the long run is inescapable.

[sewa mobil jakarta]

Nice article, thanks for the information.

[McKinney]

The economic problems of the Big EZ South are not much different from the Latin American debt crisis of the 1980’s.

O’Driscoll: “Berlusconi and Sarkozy were faux-conservatives who promised reforms and did not deliver.”

Exactly! And Like Republicans?!!!

An econ prof at the University of Central Okla has a model for predicting presidential elections that is very accurate. He has one predictor variable, gdp growth in the second quarter of the election year. If gdp growth is 2.5% or greater in that quarter, the party of the incumbent president usually wins the presidency in the fall election.

[Allan Walstad]

Cunning remark by FDominicus. Dr. Bloodletter can always blame the previous physician for making the patient's condition "worse than I thought." That's Obama's excuse. It's also the left-collectivist excuse for FDR. Indeed, it's in every political playbook as sure as a run off-tackle is on every NFL team's list.