Mises Daily: Thursday, June 13, 2013 France s Cul-De-Sac by David Howden and Jacques Briam Over a year

ago, in the midst of an ongoing economic crisis, Franois Hollande cel ebrated his victory over Nicolas Sarkozy in France s presidential elections. Holla nde became the leader of a country in economic turmoil. In the past year, he has had relatively free rein to carry out his economic agenda, since the Socialist Party he leads has a majority in the French Parliament. France has a history of grandiose government spending, even among European count ries. Public spending accounts for 57 percent of national output, and public deb t accounts for over 90 percent of GDP. While austerity has been the buzz word in the rest of Europe since 2009 resulting in a modest decline in government spend ing as a percentage of GDP, France is not part of that trend. The public sector now accounts for almost two-thirds of all direct economic acti vity, and more if indirect activity is counted. This large and growing dependenc e on government is disastrous because it is funded by ever higher taxes. These h igh taxes drain the private sector (while simultaneously giving the public secto r an aura of impotence) and deficit spending obliges future generations of Frenc h citizens to pay off the largesse of today s government. Deep within the French psyche is the idea that cuts to the gargantuan public sec tor would cause undue harm to everyone. This inability to envision a French econ omy where the private sector picks up the slack when fewer public services are p rovided has reinforced the reluctance of politicians, and in particular, Franois Hollande, to use austerity measures to overcome the crisis. Instead, the current solution is to increase government spending and create more jobs in the public sector. For this reason, Hollande s administration has pledged to increase the min imum wage for all employees, public and private, and create 60,000 new public te aching jobs. In addition to the present increases in public expenditures, Hollande has commit ted to future increases in public spending. His decision to roll back Sarkozy s in itiative to raise the retirement age from 60 to 62 obliges taxpayers not only to support the burgeoning ranks of public employees working today, but the growing n umber of public retirees supported by generous social security payments. In a bid to combat rising interest rates on its bonds, the French government has recently commenced a campaign to raise taxes to fund the country s ballooning exp enditures. Indeed, one of Hollande s primary electoral promises was a top tax rate of 75 percent on the so-called riche (income earners above 1 million euros). France has one of the highest corporate tax rates in the European Union, exceedi ng even the famous high rates of Sweden. While the European Union s average tax ra te has been decreasing (from about 50 percent in 2005 to about 44 percent in 201 2), France s tax rate has remained constantly high (over 65 percent from 2005 to 2 012). In addition to high tax rates French businesses are faced with the highest socia l charges in the European Union, as well as oppressive government regulation. Th ese factors make for an unattractive business environment. Recently several larg e companies closed their doors rather than deal with the difficult business cond itions, resulting in thousands losing their jobs. New companies are slow to appe ar in such a climate.

In response to the threat of higher French taxes, British Prime Minister David C ameron, offered to roll out the red carpet for any high-income earning Frenchmen w ho wanted to avoid paying French taxes. Of course, we would be remiss to think t hat Cameron was motivated by anything other than to attract tax dollars into his own strained coffers. The result, however, was tax competition between states. Before the advent of the European Monetary Union, highly indebted countries soug ht to cure their fiscal woes through inflationary policies. France removed this option from the table when it adopted the euro. Indeed, as Philipp Bagus demonst rates in his book The Tragedy of the Euro, it was the French who aggressively pu shed for monetary integration within Europe. They must now adhere to the results of this decision. The monetary union functions somewhat as a modern gold standard. Just as gold on ce kept states from running prolonged deficits, today the loss of an independent monetary policy constrains European member states in a similar way. With no recourse to an inflationary monetary policy, the French government is at the mercy of the bond market. As lenders worry about the French government s abil ity to repay their debts, now and in the future, interest rates will rise (as th ey have already). The French government will have to rein in its deficit spendin g either through spending cuts or tax increases as the cost of borrowing goes up . The private sector is already a heavily burdened minority, and given the curre nt exodus of French companies and entrepreneurs to other countries, any further taxes would be coming from an already shrinking tax-paying base. Like many of his counterparts, Franois Hollande realizes that the beleaguered Fre nch economy needs change. What he must do is focus on the areas that he can chan ge. He must decrease public spending and lower taxes in order to increase employ ment. In addition, the private sector must be allowed to heal and recover, inste ad of treating it as a goose to be plucked. This is the only way the French gove rnment can continue to function, and more importantly, the only way to get Franc e out of its economic cul-de-sac.

David Howden is Chair of the Department of Business and Economics, and associate professor of economics at St. Louis University, at its Madrid Campus, and winne r of the Mises Institute's Douglas E. French Prize. http://www.mises.org/daily/6454/Frances-CulDeSac -----------------------------------------------Comments (7) garegin the problem is that austerity is associated with Satan and muhaha sounds. The pr oblem is that people have a folksy belief that sun would shine tomorrow. Yeah, l et me see you gamble away a mortgage and see what happens to your life! P.S. It's not like countries like France or Russia didn't collapse into a rubble when their kings burned through the cash. garegin it also seems that since the fall of the Soviet Union the centre-left has been b

eating around the bush about how large the public sector should be. We already k now that full state ownership is basically mass famine (even USSR didn't have it full, anyway) and yet they keep clamoring for more nationalization. Why won't t hey just come out and say that they favor system like in Nazi Germany where priv ate property was only nominal. France since DeGaule has basically been the same thing. Jozsef Vizkeleti Please stop calling European tax revenues "Tax dollars". It is "Tax euros" or "T ax pounds", etc but there is nothing dollars about it. Paul Marks The French government (like so many governments) seem to believe that they can b orrow as much money as they want - because the Central Bank (in this case the Eu ropean Central Bank) will just create money (from nothing) to buy their debt (th eir bonds).. There is a case before the German Constitutional Court - and the EC B (European Central Bank) acting in this way is blatently unconsitutional, but t he American Consitution does not matter to the American Supreme Court, so why sh oulld we assume that the German Consitution matters to the German Constitutional Court? When will the orgy of government spending, taxes and regulations in France end? As alwaya it is hard to pick the exact day - but it will end. The collectivist t radition (going back to Louis XIV minister Colbert - indeed long before that) wi ll be proved to be wrong, and the French Liberal (real Liberal) tradition of the Say family and Bastiat (and....) will be proved to be correct.