France Must Let Go Of Its Economic Delusions If It Is To Prosper
It will be a gloomy Bastille Day in France Monday. The French economy remains mired in its worst economic slump since the Depression. For eight consecutive years, almost 13% of the population of France has been unemployed. Among young people, the unemployment rate exceeds 20%.
It's true that France's generous welfare state prevents the unemployed from going hungry or homeless. But no welfare state can alleviate the psychic pain of unemployment: the feeling that one is useless, that one is doing nothing with one's life. Nor is it clear that France's generosity can continue for very much longer. The country's budget deficit is scraping 4.5% of gross domestic product, or almost five times worse than Canada's. Since French taxes are among the heaviest on earth, the only way to balance the budget will be with draconian spending cuts -- tough medicine in a country already in severe economic distress.
In their despair, the French are turning to political extremism. The ultra-nationalist National Front won 16% of the vote in the first round parliamentary election last month. The Front proposes to rescue the French economy by expelling France's Muslim population -- not only immigrants, but those born on French soil -- and then spending billions on government make-work programs for everyone else.
At the other extreme, the French Communist party has come back to life. It won 40 seats in parliament in June, just enough to give Socialist Prime Minister Lionel Jospin his majority. The Communists still champion what might be called the anti-Galileo point of view: The earth doesn't move around the sun, two and two do not equal four and you can solve your economic problems by nationalizing banks and steel mills.
What is so strange about this sad situation is that, just across the channel, the British are providing the French with the proof that a high-unemployment European economy can create jobs nearly as effectively as the U.S. The British economy is booming, and it looks likely to continue booming. Last Monday the new Labour Chancellor of the Exchequer -- Labour! -- brought in his first budget, and cut Britain's corporate tax rate by two percentage points. Britain is now the single-largest recipient of foreign investment in Europe, and not only from English-speaking North America as one might expect, but from Japan, Taiwan and South Korea as well.
The moral of this story is that in politics, ideas still matter. The French governing classes still adhere to the statism of the past. I attended a conference of prominent Europeans some weeks ago, and was startled by the extent to which even right-wing Gaullists denounced the alleged "savagery" of capitalism, and insisted that France would not accept what they called (preposterously) the "Anglo-Saxon" model of globalized capitalism.
Aesop tells the fable of the Greek monkey trap. You put candy in a narrow-necked jar, the monkey reaches in and grabs a fistful, and then is caught because he can't pull his hand out of the jar without letting go of the candy. His greed holds him fast.
Like the monkey, we so often think we are prisoners of circumstances, when we are in fact prisoners of our own misconceived ideas. France could prosper tomorrow. It need only cut taxes, reduce the spending that forces tax rates up, soften the rules that forbid businesses from firing people (and therefore deter them from hiring people), and take a more tolerant attitude toward foreign investment. It's not a very difficult plan: Free-market economics has been enriching every country to try it since the British invented it 200 years ago.
But to prosper, France must let go of its delusions that there exists some unique French-speaking version of economic logic that somehow spares France from the need to do what every other country in the world must. That economic logic doesn't in fact exist. The French get no more benefit from it than Aesop's monkey gets from the candy in its paw. But so long as they clutch at it, their nation will remain ensnared in endless recession, will fall ever farther behind the English-speaking world technologically, and will become ever more vulnerable to the terrifying blandishments of political extremism.
Originally published in The Financial Post