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Macronomics: The Hand of the State Vs. the Invisible Hand

    With an unemployment rate at 9.9% in the last quarter of 2016, a GDP growth rate at 0.3% in the first quarter of 2017, and a chronic public deficit, France’s new president, Emmanuel Macron is expected to deliver on economic reforms.

    Macron intends to create a ‘new model of growth’ centred, on sustainable development, digital technologies, a ‘modernisation’ of public services and urban renewal. A €50 million investment plan implemented over 5 years will support the reforms. Some left-leaning publications have been keen to dub him a neo-liberal, but ironically enough, the Soviets were rather fond of five-year plans.

    It would of course be an exaggeration to claim that France is going down the road of a planned economy, but the devil is in the detail, and this reflects Mr Macron’s lack of commitment to a truly free-market economy. Although the French president would argue that the left and right cleavage is now irrelevant, he still went out of his way to woo people from both sides of the political spectrum. This bid to get as many people as possible to support him certainly led to contradictions. One of them being his stated intention to reduce public expenditure and reduce corporation tax, whilst at the same time leaving most welfare provisions untouched.

    Moreover, the investment plan will be funded through borrowing. En Marche’s website states that borrowing costs are historically low and inferior to the growth rate of the French economy, which would therefore mean that borrowing will not add to debt as a percentage of GDP. The cost of borrowing is only inferior to the growth rate because the European Central Bank’s (ECB) main interest rate is at 0%. Perhaps Mr Macron would benefit from browsing the Centre for Policy Studies’ publication The Kindness of Strangers, which makes clear the dangers of loose monetary policy.

    In recent years, the ECB has conducted a loose monetary policy with a relatively poor success in bringing about strong economic growth. Emmanuel Macron’s commitment to an ever-greater European integration seems to indicate that he is completely oblivious to the structural flaws of the Eurozone, whereas tying up the-already-fragile French economy with the Eurozone would be multiplying the magnitude of the impact of any new economic downturn.

    What is more, two of the ECB’s high-ranking officials have recently come out and said that monetary stimulus in the Eurozone should be scaled back. If this were to happen, and rates were to rise, or simply if sceptical ECB council members were to have it their way and quantitative easing was cut down, Mr Macron would have got himself in quite a predicament. Essentially, this would leave the French President facing two choices: giving up one of his key economic proposals; or carrying on regardless, and subsequently adding to the already high level of French public debt.

    Macron is right: France badly needs reform, yet the means he is intending to use will not lead to the expected ends. Stimulating the economy through governmental spending and lowering the general level of taxation is a reheated form of Keynesianism, and just like in the UK until the advent of Margaret Thatcher’s supply-side economic policies, this will most likely fail in rectifying France’s economic issues, and may in fact amplify them.

    The answer to France’s endless economic agony is to at last reduce the role of the state. This investment plan is only a disguised way to keep the state as one of the main actors in the French economy, when what is needed is for the omnipresent hand of the state to give way to invisible hand of the market. This will be no easy-task as state interventionism is deeply rooted into the French political culture. Yet genuine reform will only come about if the French government takes on France’s endemic problems and finally part from the illusionary and misleading cocoon of state interventionism.

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