April 20, 2017
The New York Times, April 20, 2017
If the first round of the French presidential election on Sunday is now too close to call, that’s partly because of Jean-Luc Mélenchon’s last-minute surge in the polls. The media describe him as a populist from the far Left, and as he has risen, attacks on him have intensified.
One common criticism is that his economic proposal to jump-start growth in France while reducing mass unemployment and inequality is pie in the sky.
Is it, though?
Mr. Mélenchon would certainly face significant political hurdles if elected, including the need to build political support for his program in Parliament. But the French economy, despite serious problems, could sustain, as well as benefit from, his proposals.
He wants to reduce unemployment from 10 percent, its current level, to about 6 percent over the next five years, partly by increasing government spending by some 275 billion euros, or about 2.3 percent of GDP. The money would go to major public spending in renewable energy and environmental projects, housing and antipoverty programs, as well as toward lowering the retirement age and increasing wages in the public sector.
Mr. Mélenchon’s critics say that France is already living beyond its means. The French enjoy a level of economic security and living standards that most Americans can only dream about: universal health care, free childcare and public-university education, a 35-hour workweek, higher life expectancy, and lower per capita energy consumption and greenhouse gas emissions. The new government, say people who oppose Mr. Mélenchon’s views, will have to focus on reducing the public debt.
But the numbers do not bear them out.
The most important measure of a country’s public debt is the interest burden it must pay annually. The interest France currently pays on its debt amounts to 1.7 percent of GDP, which is modest by both historical standards and most international comparisons today. The United States, by comparison, had interest burdens on its debt ranging from about 2.4 percent to about 3.1 percent of GDP throughout the 1990s, and during that time it enjoyed the longest economic expansion in its history.
France doesn’t have to worry about inflation either. Inflation has been at 1.1 percent over the past year, which is well below target, and the government can borrow at a real (inflation-adjusted) interest rate of about zero.
France’s main economic problem today is the same as that of the eurozone: virtually no growth in GDP per capita since the world financial crisis of 2008. And the main culprits of that are the misguided policies of the economic orthodoxy in Europe.
In the view of many economists at the International Monetary Fund and, say, Emmanuel Macron, a former economy minister of France and now a presidential candidate, the fundamental cause of unemployment in France is a rigid labor market — not, as Mr. Mélenchon and others argue, inadequate demand in the economy. So, their proposed fix is to lower labor costs by reducing the bargaining power of unions, making it easier for employers to dismiss workers, and raising eligibility requirements for social or unemployment benefits.
Reforms of this kind have been passed over the last few years, including the so-called “loi Macron,” which relaxed rules for letting employees go. More have been recommended by the IMF and European Union authorities.
But — to take just one example — cuts to France’s pension system in 2010 were as unnecessary as they were unpopular. The year before, projections by the European Commission showed that spending on public pensions in France would increase by just 1 percent of GDP over the next 60 years. Given that France’s GDP was projected to more than double over that period, that increase would have been eminently affordable.
So why not put some money into public investment that will provide positive real returns while creating new jobs?
Yes, high unemployment has been a fixture of the French economy for several decades now. But a major fiscal stimulus could spur overall demand in the economy, and that would encourage employers to hire workers.
The French can also afford their cherished welfare state because labor productivity in France is high — just above that in Germany. A better output per hour of labor allows for decent wages and, with sufficient taxes on both labor and capital income, for social expenditures that provide some measure of economic security.
There are, however, constraints from the European Union. France has no problem with its current account balance at the moment, but were it to try to jump-start its economy while growth in the eurozone remained sluggish, it could eventually run an unsustainable deficit. Under the Maastricht Treaty, France is supposed to keep its budget deficit under 3 percent of GDP. That requirement, along with France’s commitment to the European Union program for deficit reduction, would appear to preclude spending increases such as the ones that Mr. Mélenchon proposes.
But Europe cannot endure another decade of mass unemployment, which denies a future to so many young people and fuels the xenophobic far right. This is the reason Mr. Mélenchon has called for renegotiating European Union treaties. Some argue that position is too radical. Yet it is those who champion strict adherence to the European authorities’ failed economic policies who stoke anti-European sentiment and endanger the future of European integration. France has enough clout within the eurozone to help steer it in a better direction.