April 24, 2012 | Graham

A natural experiment, or catastrophe for the World?

If the French elect Francois Hollande the world may get a neat natural experiment where we can compare high Keynesianism to the Washington model using the comparative economic performances of France and Greece.

Or it may be that with one of the two strong men of Europe defecting to the high expenditure, high debt side of the argument that the whole of Europe will be pushed into crisis.

Suddenly, for the first time in my life, this is a French election that matters.

While we might like to pretend that our future lies in Asia, it doesn’t – it lies in the world, and the economics of that world are heavily influenced by what happens in Europe.

Hollande stands for defending the French welfare state, currently running at 56% of GDP. That figure looks set to rise as his policies include:

  • Hiring 60,000 new teachers and investing heavily in training particularly of young people
  • Increasing tax to 75% for those earning over a million euros
  • Freezing fuel prices ¬†for three months
  • Increasing allowances for those with school-age children
  • Lowering the pension age from 62 to 60, after it was only just increased

Perhaps he thinks that increasing tax will help to stabilise outlays, but experience over the last century shows that for people earning that sort of money taxation is voluntary. They either rearrange their affairs to deal with it, or move elsewhere. Not all of them, of course, but economic battles are won and lost at the margins.

Still, this tax increase is significant as it is the first that I can remember since Proposition 13 was passed in the US in 1978 – 34 years ago. It was the starter’s gun of the global tax revolt.

According to the IMF the largest economy in the world is the Eurozone at $15,821,264 International Dollars is around 20% of world GDP, and is followed by the US on $15,094,025, and China on $11,299,967.

France’s GDP is $2,217,900, so about 15% of Eurozone GDP, and compares to Australia with $914,482. Germany is the largest Eurozone country with GDP of $3,099,080.

While China is growing rapidly and a large proportion of this is based on modernisation of its agrarian economy, it still relies heavily on exporting to Europe and the USA. And Europe relies heavily on France and Germany.

The trek back from the excesses of the 90s and 2000s is going to take a while. It’s going to take a lot longer if the French take the scenic route.

Particularly as an Hollande win will signal to other European politicians, like the Greek ones, but also those in Spain, Portugal and Italy, that prosperity through austerity may sound good to financiers but it won’t be rewarded by voters.

It may be that the voters win in these countries, or that the financiers do. Either way we’re looking at some interesting natural experiments that will keep economic conferences buzzing for decades.



Posted by Graham at 6:07 am | Comments (1) |
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1 Comment

  1. A good summation. History shows the French are ever adept at storming the wrong Bastille. The Eurozone’s problems have already bitten the world badly. It’s fashionable to blame the Greeks, but they’ve never balanced a budget yet and would not be in the Euro except for grandiloquent supranational politicking. The likely election to the French presidency of someone who so significantly fails to understand that you cannot have what you cannot pay for, despite all the evidence (not to mention common sense), is very worrisome.

    Comment by Richard L — April 24, 2012 @ 11:11 am

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