An unexpected solution for restoring public finances that no one is talking about in France.

French Minister of Economy Bruno Le Maire stated that he maintains the goal of reducing the deficit to 3% by 2027, after the National Institute of Statistics and Economic Studies (INSEE) announced that France's budget deficit will reach 5.5% of GDP by 2023.

The lack of growth is a serious problem for the French public finance system. It turns out that there is a solution for restoring public finances that no one in France is considering.

National radicalism

The American experience shows that it is possible to achieve economic growth. What is the need for restoring growth, and why is it not just a purely magical solution?

Don Diego de la Vega:

The American experience has two sides. It shows that growth can return, but primarily it demonstrates that it cannot be commanded. It's not as simple as a decision in Washington bringing back growth, and the Fed cannot summon it at will. It's also important to remember that the potential for growth in the United States has been significantly greater than ours. We must also consider how this growth is then invested: the United States has used it to increase its budget deficit. Their deficits are larger than ours, which means that excess growth is paid for by the taxpayer. This creates a kind of vicious circle that fuels the stock market, which in turn fuels wealth, ultimately leading to what is called the "quality effect." All of this can be positive, of course, provided that growth is sustainable and stabilizes public finances.

However, this does not mean that we should abandon the idea that the main solution for the sustainable stabilization of public finances is the return of growth. In particular, growth related to increased productivity. Growth from the top, so to speak. This is a primary tool, the only answer available to an economist with the appropriate education in economics. It is something that cannot be forcibly introduced, and it needs to be invested in properly if we hope to stabilize public finances. It should also not come from tax increases: that would be growth, of course, but "dirty" growth. Unfortunately, in France, we often tend to spread too much wealth when we have the opportunity.

Can we say that the lack of growth, both in France and in the eurozone, is not a curse, but rather a result of self-inflicted suffering?

This is certainly a problem, partially related to excessively high interest rates and very high exchange rates. Thus, it is an issue that is at least partly connected to the European Central Bank (ECB). As for fiscal policy, it can be criticized in many ways, but it cannot be said that it has been too strict. Overall, France's fiscal policy has been very poorly balanced for several years now. This is especially true after the pandemic. Our fiscal policy is poorly funded, it is unreliable, and it is often aimed at rescuing failures. It is expensive, and despite that, it is not adhered to. If we have done ourselves a disservice today, it is not due to strictness.

The extent of the damage is evident in the real estate sector, credit markets, and many other specific areas. The mid-market industry is particularly suffering, not to mention other issues related to extreme complexity or excessive regulation that are affecting France and Europe. The same is true for the tax sector. It is in these areas that it is easiest to act today, as our politicians have decided that the monetary sphere is beyond our control. Naturally, this is something that is contested, as we must remember that the ECB only has the powers that we grant it. It is reasonable to consider that we are the shareholders, and therefore, we can partially regain control. Or at least, raise more questions about it. However, after we have abandoned this path, we are left with only the regulatory area. Sectoral liberalizations need to be carried out. Expanding reproductive supply, that is, making the labor market more flexible, even if, unfortunately, it seems like a pipe dream. There is strong external pressure in favor of increasing regulation that needs to be addressed.

Theoretically, simplification could stimulate growth, but I am skeptical about it because our administrative bodies tend to accumulate regulation upon regulation. We have too many levels of administration, too many people who are interested in complicating regulations because it secures their income.

Why don't the French see the macroeconomic management mistakes in the eurozone and the French economy?

This is undoubtedly a very broad question. Several answers that we have already discussed earlier in these columns help to explain it. There is, of course, what seems to be a primary budgetary issue, which is often accompanied by a complete unwillingness to touch on monetary policy. Is there also a prohibition on the independence of the European Central Bank or a ban on the euro? Not to mention the blindness to the concept of administrative competition or the fact that public opinion holds that you are either a communist or a fascist if you dare to touch (or even think about touching) monetary policy. In my opinion, this blindness is dictated by one simple fact: we deny any form of relevant comparison. Some, for example, might point to European nations that are not part of the eurozone. Overall, they manage this much better (not necessarily in all areas), as illustrated by the Swiss case. Switzerland does not face the same problems as France, particularly in the mid-sized industrial sector. We could also talk about the Norwegian case, which is characterized by its strong ties to hydrocarbons, or the Swedish case, which is especially related to the significant reforms Sweden undertook before joining the European Union. Practically all European countries outside the ECB framework show super performance compared to other countries.

Another important point that helps to better understand our situation is that we do not punish for mistakes. In fact, it's even worse! Often, they are rewarded. Take, for example, Élisabeth Borne.

Don't forget about the general trend towards reduction, which affects both the associative and militant environment. Representatives of this idea are now organizing into battalions, as evidenced by the Yankovychs, for example. Our political figures are untouched, primarily because they understand well that the reduction of the private sector, which mechanically implies a reduction in the public sector as well, is also at play. This doesn't mean that some of our key sectors are not affected by this ideological model: it would be impossible, for instance, to engage with the goals of the Paris Agreement without resorting to reduction. Our technological base today does not allow us to hope for such a decrease in our emissions without cutting back on activities and growth. The capitulation to growth is evident; it is now viewed as a spectacle that does not benefit citizens.

Given the scale of violations in public finances, is the idea of reducing government spending today just a vain hope?

This remains a very interesting prospect: reducing government spending ultimately leads to an increase in freedom for all participants. I do not want to live in a society where government spending accounts for 55% of GDP, which is almost at the level of OECD countries, and which could subsequently rise to 60, 65, or even 70% of GDP. Before talking about wastefulness, before discussing better use of public funds, we should also talk about freedom. I think about the freedom of an ordinary citizen not to be subjected to three regulations and four directives every 100 meters, but I also think about basic social mechanisms. It is necessary to provide certain public services aimed at protecting the most vulnerable segments of the population. However, to ensure the normal functioning of these systems, we first need to avoid counterproductive spending... Otherwise, we risk facing regressive logics. This could mean being attentive to the issue of immigration, for example.

Reducing government spending remains something important.

The real question is how to ensure such a recovery? First and foremost through growth, but unfortunately, we are facing a situation where we are no longer able to activate our growth channels: we no longer control some of them, and in some cases, we are simply refusing to continue growing. Therefore, we need to undertake disciplined management. However, with a undisciplined political elite and our administration, this will be difficult. We need to rein in our administration, as reforming public governance with constant territorial maps is not feasible. Then we need to tame the very imposition of state powers and move away from this "all priorities" model that is so valuable to Macron's presidency. We have placed too much emphasis on public service, more than our growth prospects allow. To make all this work, we will need a channel for unearned rights, which could correspond to the ability to play on the exchange rate, selection, and devaluation. Since money has been left solely under the management of the ECB, this is no longer possible. After a long time of talking, over 20 years, when the sewage has started to flow, the smell has become unpleasant. To get out of this situation, we would need to restore the real value of the euro against the dollar, so as not to have to destroy part of public funding. This is not a pleasant and possibly a feasible solution, but unfortunately, that’s how it is. It is hopeless.

We forgot that one of the reasons for the collapse of the Fourth Republic in 1958 was also the crisis in public finances that the country was facing. How did Charles de Gaulle and his government rectify the situation?

We can also mention the works of Florent Aftalion, who noted that the French Revolution occurred due to a crisis in public finances in the 1770s and 1780s. Of course, you rightly point out the year 1958 and the reforms carried out by General de Gaulle and Jacques Rueff. It is also worth mentioning the Poincaré franc, which was one of Jacques Rueff's tasks (with the help of Raymond Poincaré). I would like to see a similarly comprehensive reform today, but it was enough to listen to Macron in 2017, in front of the Louvre pyramid, to understand that it was not on the agenda. To implement a reform, one must start from the premise that one cannot rely on growth. He did exactly the opposite. We have lost the sense of long-term thinking.

The Ruff Plan, let us remind you, was based on the idea of linking fiscal discipline with a program of sectoral liberalization, although not entirely comprehensive. There were real efforts to reduce regulatory burdens, a new franc, and consequently, devaluation. Unfortunately, devaluation is no longer an option today. This is where we need to start; budgetary choices are aimed at stabilizing the situation. Every restriction provokes a protest movement, as seen in the case of the "yellow vests."

To achieve a similar result, we need to gather qualified individuals with a proven reputation who know what they're talking about. They need to develop measures to address various growth barriers and avoid falling into a catalog format. We need about twenty, maybe thirty simple and quick measures that can provide a boost. The exact opposite of what we have now.