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French candidates go wild on wrong problem

by Migeru Thu Dec 21st, 2006 at 07:17:34 AM EST

From the diaries. -- Jérôme. Originally posted at Eurozone Watch by Daniela Schwarzer.

Daniela is one of the leaders of Newropeans, and I had a chance to meet her at an informal event in London earlier this month. She maintains a blog together with a colleague and she has agreed for me to cross-post her latest entry here. I expect her to take part in any discussion in the comments and hope she will cross-post more in the future without my intervention.

The full text of her blog entry is below the fold, but here's the first paragraph by way of introduction:

Eurozone Watch Blog: French candidates go wild on wrong problem (by Daniela Schwarzer on December 19, 2006)

ECB-President Jean-Claude Trichet has clearly gone into the offensive. In an interview published in three European daily newspapers in parallel on Monday, he justifies the ECB's recent rise of the interest rate ("We are not hampering growth!") and underlines the persisting risks of inflation the ECB sees. He did not speak to the French press (but to the German daily Der Tagesspiegel, the Luxemburger Wort and the Greek Ta Nea) - but most of the answers he gives can be read as a reply to the recent critique that has emerged from France.


ECB-President Jean-Claude Trichet has clearly gone into the offensive. In an interview published in three European daily newspapers in parallel on Monday, he justifies the ECB's recent rise of the interest rate ("We are not hampering growth!") and underlines the persisting risks of inflation the ECB sees. He did not speak to the French press (but to the German daily Der Tagesspiegel, the Luxemburger Wort and the Greek Ta Nea) - but most of the answers he gives can be read as a reply to the recent critique that has emerged from France.

Leading politicians (among them the two most likely opponents for the French Presidency, Ségolène Royale and Nicolas Sarkozy), have engaged in a polemic around its recent decision to raise the interest rate by 0.25 percentage points. But that is not where they stop. Since November, an intense debate questioning the ECB's policy, its instruments and its status has evolved. Top politicians (including Prime Minister de Villepin) have called into question the ECB's role, suggesting that governments should have a say in the bank's decisions, especially as the euro rises against the dollar.

Most of the current French polemic can be assigned to the upcoming election battle, which will gain pace in January when the neo-Gaullist UMP nominates its candidate (most likely Sarkozy) for the April/May 2007 Presidential elections. Unemployment, especially among the youth, is a persistent issue in the domestic debate to which all candidates will have to present a convincing answer. As the scope for action in the public sector (job creation programmes etc.) is small due to tight public finances, while programmes to enhance employment in the private sector have not brought the intended results in recent years, the candidates are probably glad to have found a scapegoat - the ECB.

As such, it is a good sign that the debate on economic governance in the Eurozone reaches the top political level in the second largest member state of the currency union. The direction the debate takes however is deplorable for two reasons.

First, the positions put forward start out from a purely national logic, completely ignoring that fact that it is in a European dimension that monetary (and most of economic) policy should be discussed once there is one single currency. The French populism comes at a cheap price under the conditions of EMU: If the same polemic had developed around the Banque de France back in the 1980s/1990s involving Presidential candidates and the Prime Minister, the result would very likely have been a depreciation of the French Franc resulting from a loss of trust among market participants. Now, market participants know that the ideas currently put forward in France will not lead the ECB to loosening its monetary policy. So the French critics are free-riding on the fact that the euro is there - and share the potential costs of their irresponsible behaviour with their Eurozone partners (see below).

Second, directly confronting the ECB will not bring the EMU's economic governance forward. It is totally unrealistic to assume that there is scope today for a reform of its statutes (which requires unanimity of the member governments) or that there are efficient means to influence its decisions politically. By taking up positions of the pre-Maastricht era (in other words: the 80s of the last millennium) as aggressively as has be done in recent days and weeks, dialogue on more realistic reforms with those governments which stick to the fundamental design of EMU (such as central bank independence), becomes ever more difficult. Other member governments have already reacted with hostility to this debate, which will make constructive dialogue more difficult. For instance in Germany, where in recent years some openness to discuss economic governance in the EMU developed, the debate in France re-awakes fears that EMU cannot be maintained as the stability union it was designed for - and diminishes the readiness to engage in a pragmatic debate on future reforms of the EMU.

Regarding the ECB, if any, the direct confrontation is likely to have the oppposite effects of what French politicians call for. If the bank gets the feeling that the polemics against it gain so much influence that market participants revise their inflation expectations to a higher level, it will get ever more insistent on price stability and more restrictive in its monetary policy to avoid secondary effects through wage increases based on higher inflation expectations.

This is why other EMU-member governments should pay attention to the effects of the economic populism of both Ségo and Sarko. All members of the currency union have to bear the costs, if ever the ECB reacts by raising the interest rates more quickly than it would otherwise have done.

French politicians should rather use the political and economic weight of their country to speak to the other member governments in order to get a joint assessment of the situation. Other member states meanwhile should be very clear what kind of debate they want to have on the future of the EMU. As the German EU-Presidency starting on 1 January 2007 does not want to have this issue on its Agenda, the best first adressee is the Eurogroup's President Jean-Claude Juncker.

For a change, France should test a strategy where it considers the ECB's monetary policy - like it or not - as a variable in the game which it will not be able to influence to the better (meaning lower interest rates from the French point of view), but could rather push it to the worse. Instead, it should take into consideration which other means are there to improve growth and sustainable public finances the Eurozone.

At least four issues should be considered: fiscal policies and the macro-economic policy mix in the EMU, the need to moderate unit labour costs developments in some countries (through an increased dialogue with the social partners) in order to giver lesser reasons to the ECB to take a rigid stance, the need to improve the functioning of capital, labour and goods/services markets in the EMU and finally the question, how in a mid-term perspective the EMU could be given a democratically legitimate fiscal regime including mechanism to ensure cyclical stabilisation across national and regional borders which could make the real interest rate problem less salient. Tackling these issues makes more sense than bashing the ECB - if the objective really is to give EMU an economic government, which Sarkozy again claimed yesterday.

Display:
I suppose it's a good thing that it's a Frenchman chairing the ECB, as that way there's no question of national animosity playing a role...

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Wed Dec 20th, 2006 at 07:06:39 PM EST

fiscal policies and the macro-economic policy mix in the EMU, the need to moderate unit labour costs developments in some countries (through an increased dialogue with the social partners) in order to giver lesser reasons to the ECB to take a rigid stance, the need to improve the functioning of capital, labour and goods/services markets in the EMU and finally the question, how in a mid-term perspective the EMU could be given a democratically legitimate fiscal regime including mechanism to ensure cyclical stabilisation across national and regional borders

rephrased:

  • fiscal policies and the macro-economic policy mix in the EMU,

    should be about coordination of tax policies, something the neolibs violently fight ("tax competition is good) so I epxect this about lowering taxes everywhere

  • the need to moderate unit labour costs developments in some countries (through an increased dialogue with the social partners)

    the more traditional drivel about "reform", i.e. pay workers less, because wage inflation is the only evil kind of inflation

  • the need to improve the functioning of capital, labour and goods/services markets in the EMU,

    blablabla deregulate markets

  • how in a mid-term perspective the EMU could be given a democratically legitimate fiscal regime including mechanism to ensure cyclical stabilisation across national and regional borders

    yes, the real elephant in the room, which was supposed to happen, but of course is not (cf the above 3 points) and whose absence leads to complaints about the ECB;

I've made it clear that I am generally favorable to the tight ECB monetary policy, but I'm not satisfied with the institutional framework to deal with economic policy at the EU or eurozone level, and as nothing is done there, the cognoscenti should not be surprised to see those unhappy with that situation to complain about it. If others won't help you build something for you after you helped them build somethign for them, then threatening to break what's been built is may be a way to get their attention focused on the new building...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Dec 21st, 2006 at 04:11:09 AM EST
I agree.Tight economic policy is the right one, specially for Spain, at least.

A new call for a common set of fiscal policies should be warranted...but

Should corporate taxes be the sma ein all countires, or do we need differences so that poorer countires cna get a better chance to grow?

And what about income taxes....

and what about capital gain taxes...

Should there be a set of top and bottom european rules?

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Thu Dec 21st, 2006 at 05:50:55 AM EST
[ Parent ]
Hi Jérôme,

I agree that political union is the real elephant. but as it is a huge project and will take time to achive, I would precisely not play down the importance of functioning markets.

You are right that much of what you currently hear about it is blabla.

What about this idea to see things:
Right now, functioning European markets are equated with neo-liberalism and automatically we think about de-regulation, liberalisations etc. when we here this. But markets in the EU could of course at the same time function across borders, and be regulated (to a certain degree ;) on a European scale. For EMU, the importance is that they work across borders. But given the current political climate, this will surely not be achieved by a pure neo-lib deregulation policy. The opposite is the case, just look into the growing tendencies of national protectionisms.

By the way, an interesting and debatable piece of thought on the organisation of postal services in the EU is here http://www.newropeans-magazine.org/index.php?option=com_content&task=view&id=5005&Itemid =110

This has of course nothing to do with EMU in a strict sense, but it shows much of the sensitivities related to the deregulation agenda put in place some time ago.

Looking forward to reading you,
Daniela

by dschwarzer (dschwarzer[at]newropeans dot eu) on Thu Dec 21st, 2006 at 06:32:12 AM EST
[ Parent ]
I fully agree with you. I'm personally very favorable with the idea of well functioning European markets, but, as you say, that liberalisations appears to many - and with reason - to be only about eliminating the national regulations and not about setting real European wide regulation.

The message is "regulation is bad", not "national regulation is ineffective today, let's replace it by European regulations. Actually, the discourse is right, but the practice is the exact opposite.

And thus the coordination of economic and fiscal policies at the European level do not happen, because that would go against the deregulation train, or the "sovereignty" of various countries, etc...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Dec 21st, 2006 at 07:15:43 AM EST
[ Parent ]
Given enlargement to areas like Romania and Bulgaria, to say nothing of the previous enlargement, there will need to be serious management of capital and labor markets.

I take the diarist, when she says "social partners," to mean she recognizes that this will need to be consensual between both labor and capital, and that labor will be properly represented, as it most of the time is in Germany, which would be a big improvement over the sorts of neo-liberal directives we all know and love. This consensus model would be perfect if those many, who are excluded from the labor market, also had a voice.

We get our instinctive negativity to reform I think from reading too much neo-liberal drivel coming out of England, where the model is hardly consensual.

by redstar on Thu Dec 21st, 2006 at 11:54:45 AM EST
[ Parent ]
The more integrated the Eurozone economies are, the more a supranational redistributive and social policy is needed. "Improving" the internal markets easing the flow of capital, labout, goods and services, is only going to exacerbate the dislocations within the Eurozone and make a collective redistributive policy more, not less necessary.

So now we have a unified monetary policy, but without a balancing unified emploment policy, for instance, and the kind of employment policy advocated here is focused on controlling wages, supposedly to fight inflation. Phrasing it in terms of "moderating unit labour costs" gives the game away: seeing wages as a cost only indicates the problem is framed from the perspective of business owners. As "controlling inflation" is the job if the independent ECB, the putative Eurozone economic policy of the governments should focus on things other than controlling inflation.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Migeru (migeru at eurotrib dot com) on Thu Dec 21st, 2006 at 06:21:38 AM EST
Hi,

regarding the unit labour cost aspect, it is indeed not only a question of moderating them (what you tag the "business perspective" in view of increasing competitiveness).

In fact, the argument also holds the other way round. See e.g. the debate on too low unit labour costs in Germany recently, which not only dampened domestic demand, but also increased the problem of competitiveness e.g. for Italy and others.
This of course cannot be ordered on anybody, but we definetely need to improve dialogue among the three pillars fiscal-monetary-wage policy, and work on the need that all actors increasingly interpret their perspectives in the EMU environment.

Best, Daniela

by dschwarzer (dschwarzer[at]newropeans dot eu) on Thu Dec 21st, 2006 at 06:39:23 AM EST
[ Parent ]
But when you look at the problem from the other angle (as in Germany) you shouldn't talk about "too low unit labour costs" but about "too low wages". Because, obviously, it can't be a bad thing that costs are low. My wage is not a labour cost to me, it's revenue.

Those whom the Gods wish to destroy They first make mad. -- Euripides
by Migeru (migeru at eurotrib dot com) on Thu Dec 21st, 2006 at 06:47:30 AM EST
[ Parent ]
A lot to chew on here, as we have in the past.

First of all, Trichet is funny when he cites so much evidence supposedly against what is essentially a left-right consensus in France. Of course, his evidence is largely out of context and misleading, so much so that it actually distracts from his point imho.

He says 75% of french approve of the ECB institution, which surprises me greatly, but if true I suspect it was just after the launch of the Euro, when employment was pretty hopeful and growing thanks to the PS/PCF/Green gov't.  If true (and I'd like to see confirmation) it certainly is out of context.

Equally unbelievable (except maybe by people like Minc) is his positive reference to ratification of Maastricht, which barely passed an historic referendum in which the sitting President had to make an impassionned plea on national television in order to get it passed. He clearly has forgotten about the resounding rejection of the constitution, and if he doesn't think his institution is a major part of that, he's as out of touch as much of Brussels has been for so long. Which is, at root, the largest problem in the European project today - no popular confidence in European institutions. Trichet certainly does nothing here to remedy this.

As the scope for action in the public sector (job creation programmes etc.) is small due to tight public finances, while programmes to enhance employment in the private sector have not brought the intended results in recent years, the candidates are probably glad to have found a scapegoat - the ECB.

I believe you are correct here, but I would characterize the ECB more as a "source of rightful blame" than as a scapegoat. They've historically had their rates well and demonstrably too high, in particular after German re-unification through the '90's but also in response to the softening at the earlier part of this decade (probably because the ECB president at the time didn't have the cojones to ride out the bumpy start of the Euro's exchage with the USD) and unemployment in core Europe paid a steep price.

(If the constitutions' best opponent in France's name was Dutch, Bolkenstein, it's second best opponent was also Dutch, Duisenberg.)

So the French critics are free-riding on the fact that the euro is there - and share the potential costs of their irresponsible behaviour with their Eurozone partners

You could equally say that critics of more accomodative policy are free-riding on the potential social costs of their irresponsible behaviour with their EU social-pact partners (such as France). This argument cuts both ways.

Comes down to do you want a Europe (and it cannot be Europe and not be social, and note that the PS platform says "full employment") or not?

For instance in Germany, where in recent years some openness to discuss economic governance in the EMU developed, the debate in France re-awakes fears that EMU cannot be maintained as the stability union it was designed for - and diminishes the readiness to engage in a pragmatic debate on future reforms of the EMU.

Again, this is a two-way debate. Seems to me you are saying all this French activity makes Germans more skittish about reform. Well, all that German paranoia about inflation makes a lot of French folks on both left and right real skittish about the Euro in the first place.

It's perhaps too late to go backwards, of course, but its not too late to do other things.

If the bank gets the feeling that the polemics against it gain so much influence that market participants revise their inflation expectations to a higher level, it will get ever more insistent on price stability and more restrictive in its monetary policy to avoid secondary effects through wage increases based on higher inflation expectations.

This is exactly the sort of attitude, and re-inforces exactly the sentiment against the bank for unresponsiveness to all citizens, that is already pretty high against it. And not just in France.

French politicians should rather use the political and economic weight of their country to speak to the other member governments in order to get a joint assessment of the situation.

Agreed, as another tack in the overarching debate over the ECB's role. Kind of the good cop against the rhetorical bad cop you hear Villepin and Sarko and Sego being. And of course electoral politics are driving a lot of what is being said in France today. But on the other hand, trying to get a consensus in today's environment - not easy. Not sure good cop will do the job. And there is a problem with crisis of faith in EU institutions, and the ECB is a big part of this. So I suspect that will be seeing the bad cop for the foreseeable future, until the ECB is suitably reformed, at the very least to add pursuing full employment to its charges of responsibilities. And at the present time, I suspect "bad cop" is a better technique than "good cop" in getting this done.

At least four issues should be considered: fiscal policies and the macro-economic policy mix in the EMU, the need to moderate unit labour costs developments in some countries (through an increased dialogue with the social partners) in order to giver lesser reasons to the ECB to take a rigid stance, the need to improve the functioning of capital, labour and goods/services markets in the EMU and finally the question, how in a mid-term perspective the EMU could be given a democratically legitimate fiscal regime including mechanism to ensure cyclical stabilisation across national and regional borders which could make the real interest rate problem less salient. ackling these issues makes more sense than bashing the ECB - if the objective really is to give EMU an economic government, which Sarkozy again claimed yesterday.

This actually makes a lot of sense. Where can I sign?

Of course, I have no reason to be confident that such a process could be cedibly undertaken; certainly there are no institutions today capable of doing what is necessary to come to a proper consensus which is accountable to all European citizens.

Which is why so many politicians score easy points against the ECB. And this won't change anytime soon, as long as it is run as arrogantly as Trichet appears in his comments y'day.

by redstar on Thu Dec 21st, 2006 at 11:42:37 AM EST


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