France is the ‘sick man’ of Europe

France is the ‘sick man’ of Europe

Deflation - a general decline in prices - is the new official threat in France. And of course fighting deflation would be incompatible with reducing deficits, writes Dr Emmanuel Martin.

President Francois Hollande and his Prime Minister Manuel Valls have even called on Germany and the European Central Bank to do ‘more for growth’.

There seems to be some sort of propaganda about deflation at the moment.

But some prices are actually rising. Look at the financial markets. There are bubbles which are not integrated into our consumer price indexes (CPI). Those bubbles are very much linked to the type of monetary policy which Mr Hollande and Mr Valls want.

A 10 per cent a year decline in CPI would probably be a sign of depression and we would be worried about deflation. But what we face today is very low inflation or very small deflation.

Contrary to many ‘experts’, deflation can be the sign of a progressing economy. This is an economy with productivity increases because of technological progress, more competition and so on, and falling prices are natural in a progressing economy. Falling prices are not inherently bad.

Deflation is said to postpone consumption, but consumers will not starve waiting for the price of food to drop by 0.2 per cent next month. If they want lower prices, they buy cheaper goods at discount supermarkets and shops.

The public is used to the prices of computers and televisions falling. Deflation, it seems, has become a catchphrase to frighten the public and postpone reform.

So, is the French economy making ‘progress’? No.

Today, if people are failing to make bigger purchases, such as cars and houses, it is because the economic situation in France is uncertain. It has been like this for more than six months because government policies kept changing the rules of the game. Every week or so they have fiddled with taxation and generated ‘regime uncertainty’.

Sluggish growth and rising unemployment in France will not to be cured by more spending in Germany or by looser European monetary policy. These have to be tackled by serious, broad and deep reforms - in the business climate, the labour market, and with a real reduction in public spending. Public spending is stifling the economy with taxes being spent on too many unproductive workers and wasteful spending.

Words such as ‘solidarity’ at European level have become a new expression for ‘irresponsibility’. President Hollande - like his predecessor Nicolas Sarkozy - is half-confessing to the failure of his policies and making Germany the scapegoat.

Blaming Germany is particularly shocking and bad manners in the midst of tributes to the anniversary of the First World War.

German officials politely told the French president to mind his own business - and they were right.

The German authorities decided recently to implement a minimum wage and stimulate domestic demand. Germany is already driving growth in Europe by its multinational companies investing and creating jobs in many countries ‘Made in Germany’ is in fact often ‘made by Germany’ in other countries.

Mr Hollande is unable to reform his country, despite the rhetoric. He is following his usual tactics in politics and waiting.

Savings of 50 billion euros over three years have been announced. But these spending cuts are far from enough and the president has made it clear there will be no further savings.

Details about how the savings will be made are scarce. We simply do not know how the government will find these ‘economies’.

No wonder Moody’s, the ratings agency, is becoming increasingly pessimistic about France. It has lowered growth predictions for France from one per cent to 0.6 per cent.

France is officially the real sick man of Europe, but it does not like the prescription to cure its ills and continues to look for excuses… and others to blame.

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