By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
I don’t know that I’d go so far to say it was Paul Krugman-induced, but the French government has been dissolved, primarily because two senior ministers dared speak the unspeakable and criticize Francois Hollande’s continued commitment to austerity, in the face of evidence of its failure. Forgive the WSJ business bias here:
The government shake-up—the second in less than five months—underscores the difficulties Mr. Hollande has had in rallying Socialist Party heavyweights, as well as his parliamentary majority, to a new, pro-business platform aimed at reviving France’s stagnant economy. The divisions come amid growing discontent in France and elsewhere in the currency bloc with belt-tightening measures pressed by Brussels and Berlin to meet deficit targets and repair public finances.
The open discord came to a head over the weekend after Economy Minister Arnaud Montebourg —who hails from the left wing of Mr. Hollande’s Socialist Party—said that budget cuts backed by the French president were choking both French and broader euro-zone growth. He called on France to reject the “trap of austerity” he said Germany was imposing across the Continent.
Mr. Hollande responded to the dissent by asking current Prime Minister Manuel Valls to form a new government that is “coherent with the direction he himself has defined for the country,” the Élysée presidential palace said in a statement.
Specifically, in the comments to Le Monde that set this off, Montebourg did cite Krugman, who said that “The news that industrial production has ground to a halt raises the prospect of a new recession in Europe – its primary cause, austerity.”
Hollande has a 17% approval rating in France, and this rebuke of the entire left wing of his party could easily lead to further fracturing. The ambitious Montebourg is quite openly splitting with Hollande to position himself for the next election. Valls, the choice of the right wing of the Socialists, did his duty for future positioning as well. More on this from French politics-watcher (and translator of Piketty’s Capital) Art Goldhammer.
But this really speaks to the larger reckoning (entirely too late) within the entire Eurozone, of the tragic consequences of their fiscal policies. Mario Draghi, head of the ECB, devoted his Jackson Hole speech to acknowledging the desperate need to increase aggregate demand. It was polite, dressed-up central banker-speak, but also a red flashing warning light.
The euro is at an 11-month low, economic indicators show depression-like conditions, and deflation rather than inflation is the key price stability concern. Even German GDP dropped last quarter. Draghi isn’t completely blameless – his moves have been sclerotic at best – but basically the vast majority of the European policymaking apparatus has engaged in counter-productive measures for the better part of half a decade now.
That cannot help but bring political unrest like we’re seeing in France. Hollande and Valls are desperate to hang on to the status quo, where only lip service gets paid to a change in policy regime. And it’s a function of the entire structure of the Eurozone, as Simon Wren-Lewis points out:
Whatever the politics of what just happened in France, the economic logic is with Montebourg rather than Draghi and Hollande. Once you acknowledge that fiscal consolidation is a problem, you have also to agree that the Stability and Growth Pact (SGP) is also a problem, because that is what is driving fiscal austerity in the Eurozone. The best that Draghi could do to disguise this fact is talk about an “anchor for confidence”, to which the response has to be confidence in what? He must know full well that it was his own OMT that ended the 2010-12 crisis, not the enhanced SGP.
So why has the European left in general, and the French left in particular, not learnt the lessons of the 1920s and 1930s? Why do most mainstream left parties in Europe appear to accept the need to follow the SGP straightjacket as unemployment continues to climb? … the political story of the early 1980s associates fiscal stimulus and demand expansion with ‘socialist policies’, and their failure and abandonment is associated with Mitterrand staying in power until 1995. When the markets again turned on fiscal excess in Greece in 2010, perhaps many on the left thought they would once again have to subjugate their political instincts to market pressure and undertake fiscal consolidation. Unfortunately it was not the 1980s, but events over 50 years earlier, that represented the better historical parallel.
Indeed, the immediate upshot of this is a French government in lockstep with Hollande’s austerity-lite path. But that’s a temporary condition, in France and throughout the Eurozone. The question is how long the consolidators can hold out; the fact that Germany experienced benefits from the suffering of the southern countries kept them strong, but even their economic fortunes are running thin. It’s not that Mountebourg managed to criticize austerity; it’s that he considered it good politics. That’s the new insight for the political elites in Europe. Hopefully it will continue to flower.