France Needs a "Thatcher Moment" But First a Depression

It is amusing reading day in and day out the Keynesian cure for what ails Europe, especially France.

Consider France. Public spending amounts to 57% of French GDP, yet Keynesians want still more. The sad irony is that 100% would not be enough. In fact, it would make matters worse.

France suffers from too much government spending and too much government interference everywhere one looks.

The Problem

On Sunday, in Eurozone Currency Dispute Intensifies: France Wants More ECB Action to Correct Overvalued Euro, Germany Doesn't I summed up the problem.

Inflation Won't Cure France

Contrary to popular belief, inflation will not spur consumer spending. Nor will inflation create any jobs or cause wage inflation.

Nonetheless, France demands the ECB wizards fix something that cannot be fixed by monetary policy.

Problem number one is the eurozone itself. The euro is fatally flawed. In addition, France's problem is that it is not competitive with Germany and arguably even Spain, not that the Euro is too high.

France desperately needs structural reforms.

• It is nearly impossible to fire someone in France, so businesses are reluctant to hire. 
• Government and union rules on everything are sheer madness.  
• France seeks to save local bookstores by taxing online retailers and elimination of free shipping. 
• Agricultural subsidies to save inefficient French farms (at great expense to the rest of Europe) are inane. 
• Pension rules need fixes, and the retirement age needs to increase.
• The "French way of life" is incompatible with rising productivity, especially on a relative basis, so France is increasingly left behind.

How is QE supposed to fix all that? It can't and it won't, but it increasingly looks as if the ECB may give it a try.

French President François Hollande unveiled his new government under Prime Minister Manuel Valls on August 26, and there have been a few changes. While most senior ministers have retained their positions, economic minister Arnaud Montebourg was replaced by Emmanuel Macron, a former investment banker and economic adviser at the Elysée.

Hollande is already the most unpopular president in French history so he is not risking much by removing a political opponent like Montebourg (who should never have been part of a so-called reform program to begin with). Montebourg is a man of the old school and of old ideas: Among other things, he titled himself "Minister of Industrial Resurrection." His ideas included threatening to fine businesses for each job they failed to create and speaking against globalisation.

The problem for President Hollande and any reform efforts is that, as much as removing Montebourg was a victory for his economic strategy, it was also a loss in terms of his political ability to rule both his party and the French state. We often forget that economic policy without political backing is like skiing without snow: Policy needs political anchoring.

The supply-side economics and ideas of Prime Minister Valls are good, but they are not sufficient to stop the "rotting of France". More and more observers argue that what France needs is either an European Central Bank that goes into full Quantitative Easing mode, a France that pushes for fiscal expansion, or even both. Not only is that short-sighted, it´s also wrong: France needs a new political system, a new tax regime, a less bloated government sector, and fewer subsidies. France is not lost, it´s just disorientated and lacks purpose.

France is its own worst enemy. It believes in old virtues and ideas from a time gone by. Dirigisme, the French version of socialist capitalism, has failed. In its place there needs to appear a a robust commitment to its strong and well-educated workforce. France has the ability to innovate and its early stage small- and medium-enterprise support ranks among the best in the world. Unfortunately, its tax policy, its inability to attract capital and — more importantly — its dismal return on capital are significant impediments to new growth or any reforms.

France needs a Thatcher moment, with a new leader brave enough to get elected on a mandate for change. It needs a leader brave enough to tear down a political system that generates macro- rather than micro-scaled policies, an elitist society with too many incentives for bad behaviour and disincentives for private initiative, innovation and hard work. With or without Hollande, France just doesn’t seem ready to change yet. That is why we need a deep recession and even a depression before we see real change. Real changes can only emerge from a true crisis.

The good news is that France that has never been closer to this mandate for change than now, if only because we are quickly approaching the point where things can’t get any worse. French history is full of examples of crisis yielding quickly to dramatic change. The one that comes most quickly to mind is when King Louis XVI lost his monarchical powers during the French revolution. He inherited an enormous state debt (sound familiar?) and tried a number of policy moves, but in the end the crisis overwhelmed him, and he and his Ancién Regime subordinates lost not only their power, but their heads.

It’s time for a 21st century revolution in France. Dirigisme is dying. Vive la France.