Incroyable! – France – cap-in-hand and grateful – and sinking fast

Mr Barroso, European Commission President has a way with words. In January 2013, he declared “that the existential threat against the euro has essentially been overcome”. More recently (April 3, 2013) he pronounced “that the EU has come through the worst of the crisis”. Really? And, just yesterday he was at it again, lecturing France on the need to hack into welfare payments and worker protections. Meanwhile, Eurostat released the first-quarter 2013 National Accounts publication – Euro area GDP down by 0.2% and EU27 down by 0.1% – a few hours after Barroso was on French radio delivering his threats. The data is shocking which is a euphemistic way of saying _ _ _ _ _ _ _ (fill in your own expletive). There are now 10 Eurozone nations in recession. The overall monetary union has been contracting for six consecutive quarters (that is, 1.5 years). And the situation will deteriorate even further. When does someone conclude that the current policy framework is a total failure and causing massive permanent damage? When will these lug heads in Brussels realise they are not only destroying the fabric of prosperity but also jettisoning their political aspirations – for one Europe? Amazing.

The following graph shows the annual real GDP growth for the 12 months to March 2012 (blue bars) and the 12 months to March 2013 (red bars). The data is sorted by the worst performers in the last 12 months. The latest data is incomplete for the Luxembourg, Malta and Slovenia.

What is clear is that the recession is spreading to the northern states. The Southern States are now in more or less permanent Depression and that dynamic is now consolidating in the more affluent nations in the North.

The following ten member states are now in official recession (defined as two consecutive quarters of negative growth):

Czech Republic

The EU17 (overall Eurozone) has had 6 consecutive quarters of negative growth as have the Czech Republic, Greece, Spain, Cyprus, and Portugal. Other nations are catching up fast – France (3 of the last 6), Italy (5 of the last 6), the Netherlands (4 of the last 6), and Finland (3 of the last 6).

Just before the data was released by Eurostat, Mr Barroso gave an interview with Europe1 Radio in France (May 15, 2013) – “L’effort doit continuer, la dette reste trop élevée” (Translated: The effort must continue, the debt is still too high).

Mr Barroso said that the European Union will only agree to extend to France the two-year extension before it invokes the – Excessive Deficit Mechanism.

He claimed that France had lost its competitiveness over the last 20 years and needed to accelerate the structural reforms – which is code for further undermine the standard of living of the poor and weak and create the conditions for the top-end-of-town to redistribute more real income to themselves.

The Excessive Deficit Mechanism claims that:

In order for EMU to function smoothly, Member States must avoid excessive budgetary deficits. Under the provisions of the Stability and Growth Pact, they agree to respect two criteria: a deficit-to-GDP ratio of 3% and a debt-to-GDP ratio of 60%.

Note the terminology “function smoothly”, “excessive … deficits” and then the leap to the arbitrary SGP fiscal rules, as if there is a connection.

I remind readers of the that the fiscal rules defined in the SGP and the later derivative Fiscal Compact (the “Six-Pack”) were plucked out of thin air over a weekend by the French advisor to the Mitterand government at the time.

The Le Parisien article (September 28, 2012) – L’incroyable histoire de la naissance des 3% de déficit (The incredible story of the birth of the 3% deficit) – spilled the beans.

An English language report – The secret of 3% finally revealed – says that a “former senior Budget Ministry official” in the Mitterrand government was asked to come up with the fiscal rules that would become the Stability and Growth Pact (SGP).

He was quoted as being the “the inventor of the concept, endlessly repeated by all governments whether of the right or the left, that the public deficit should not exceed 3% of the national wealth”.

Note that this reporting, itself, is misleading because wealth is a stock and GDP is a flow and the SGP budget deficit rule is specified in terms of 3 per cent of GDP (the size of the flow of national output and income in any given period). But we can overlook that reporting slip.

Anyway, the French official had this to say when asked about the origins of the 3 per cent rule:

We came up with the 3% figure in less than an hour. It was a back of an envelope calculation, without any theoretical reflection. Mitterrand needed an easy rule that he could deploy in his discussions with ministers who kept coming into his office to demand money … We needed something simple. 3%? It was a good number that had stood the test of time, somewhat reminiscent of the Trinity.

Somewhat religious (Trinity) no less.

So what appear to be “credible” rules are just arbitrary numbers – all part of an elaborate smokescreen or charade – to limit the capacity of government.

Of-course, Barroso’s latest bully-boy threats to the French reflect the general tenor in Brussels, where countless highly paid officials are making all sorts of statements about the need for nations to cut welfare, wages, jobs and the like and invoking the fiscal rules that were just made up on the spot without any economic justification or authority.

And a single moment’s reflection, for those who actually understand macroeconomics, will lead to the conclusion that the SGP provides for neither stability or growth. In fact, it is not a credible framework for ensuring the monetary system functions smoothly.

The reality is that it biases the system to crisis and then reinforces the negative impacts a crisis. The SGP provides no credible avenue for addressing the dynamics that arise when a severe aggregate demand failure as occurred in late 2007 into 2008 arises. The SGP amplifies the crisis – that is, provides a destabilising dynamic.

In my 2008 book with Joan Muysken – Full Employment abandoned – written well before the crisis emerged, we argued that the SGP (aka the “neither stability or growth pact”) would cause Europe to suffer disproportionately when the crisis that we predicted manifested. And so it has.

We wrote extensively about why the SGP had failed to stimulate growth and was incapable of maintaining financial stability once a crisis emerged.

The mainstream of my profession, of-course denied most of the obvious criticisms of the SGP. Their usual retort was that I had failed to understand the victory that macroeconomics had achieved by focusing on price stability and adopting largely conservative fiscal positions.

Please read my blog – The Great Moderation myth – for more discussion on this point.

In our book, we analysed the so-called – Sapir Report – otherwise known as the An Agenda for a Growing Europe – which was published in 2003 and was a report to the EU edited by a “panel of experts”. André Sapir managed the project which was funded by the President of the European Commission.

The Report was intended to be a review (evaluation) of how the EU was travelling in the wake of the decision to create the Eurozone within it.

It was obvious that these doctrinal briefing documents that the EU was receiving from the mainstream economists were totally wrong in their assessments. The same logic used then is still being used (and mouthed by Barroso). The result now is that massive on-going damage is being inflicted on the citizens of Europe in the name of a “credible” economic strategy.

Some quotes from the Sapir Report are killers:

Faster growth is paramount for the sustainability of the European model …

The Group considers that three pillars upon which the European economic edifice is now built are fundamentally sound …

Expanding growth potential requires first reforms of microeconomic policies at both the EU and national levels …

there is no doubt that the period of the last 15 years has been a tremendous success …

You can see that they thought they had the macro issues solved – the SGP would deal with that in tandem with the ECB pursuing inflation targetting. They are still singing from the same hymn sheet – emphasising microeconomic reform and the freeing up of markets and the reductions in welfare budgets etc.

That was the tenor of Barroso’s threats on French radio yesterday.

Please read my blog – The hypocrisy of the Euro cabal is staggering – for more discussion on this point.

France was notified on February 18, 2009 and that was ratified by the EC decision on April 27, 2009 that it was to be the subject of an excessive deficit procedure. The deadline for correction is 2013. It ultimately faces “financial sanctions” if it fails to meet the deadline.

But last month, at the unveiling of the – European Commission Spring forecast 2013 – we learned that for – France – “stagnation” will “continue this year” with an overall contraction in 2013.

There was an acknowledgement that:

The weakness of households’ real disposable income linked in particular to rising unemployment and tax increases would only be partially offset by decelerating prices, while persistent unfavourable entrepreneurs’ confidence is expected to lead to a continued fall in investment.

This is significant because it amounts to a denial of the mainstream economics proposition that underpins the claim that fiscal contraction will stimulate private demand (the so-called Ricardian Equivalence myth).

Please read my blog – Pushing the fantasy barrow – for more discussion on this point.

You can bet though that the myth will continue to be propagated by politicians who are seeking some economic authority for wrecking the joint.

At a press conference accompanying the release of the Spring Forecasts 2013, the EU Economic and Monetary Affairs Commissioner Ollie Rehn claimed that the French forecasts were “overly optimistic”. He then said:

Considering the economic situation, it may be reasonable to extend the deadline by two years and to correct the excessive deficit at the latest by 2015 in France …

It was in that context that Barroso toned in yesterday berating the French for lack of microeconomic reform.

What has been interesting though is not the belligerence and denial of the EU bosses but the cap-in-hand attitude of the French President. He was reported as saying yesterday that he was “grateful” to the EU for the two-year extension (Source).

Since when has a leader of a large nation had to express gratitude to some unaccountable elites in Brussels for allowing his/her country to accept a slightly slower death than otherwise would be the case?

We are going to smash you but with a million-tonne weight rather than a two million-tonne weight. Feel grateful, boy.

In 2012, France’s budget deficit was 4.8 per cent of GDP (down from 5.3 per cent in 2011). Its public debt ratio was up from 69.3 per cent to 84.2 per cent (Source).

By the end of 2013, on the current trajectory, the public debt ratio will be around 95 per cent of GDP. Its budget deficit is forecast by the EU to be 3.9 per cent this year, but I suspect that will be an under-estimate, given that the growth estimates are unrealistic (too optimistic).

Its unemployment rate is at 11 per cent (up from 10 per cent this time last year) and its youth unemployment rate is up to 26.5 per cent (up from 23.1 per cent this time last year).

Meanwhile, the Bundesbank boss Jens Weidemann was reported in the article (May 9, 2013) – ‘Can’t Call That Savings’: German Central Bank Head Blasts France – that he was “adamantly opposed to any delay in adjustment to 2015 for France:

You can’t call that savings, as far as I am concerned … To win back trust, we can’t just establish rules and then promise to fulfil them at some point in the future. They have to be filled with life … Particularly now, at a time when we have strengthened the rules regarding deficit reduction, we shouldn’t damage their credibility by taking advantage of the built-in flexibility. What we need is trust in our ability to clean up state finances.

It is a strange concept of trust he must have. Push even more people to join the millions of unemployed that the failed policy stance has created to date is in some way meant to elicit trust in the policy process and the credibility of the state as a vehicle for prosperity and well-being.

I wonder if Dr Weidmann took a trip to Spain and asked on the unemployed 15-24 year olds what they thought about trust what answer he would get. He wouldn’t have trouble finding someone to interview given the current youth unemployment rate there is now 55.9 per cent and rising fast. Eurostat haven’t published the Greek youth unemployment rate since January when it stood at 59.1 per cent and had jumped between March 2012 when it was estimated to be 52.3 per cent. When we next get data for Greece, it will be well above 60 per cent.

That is trust-building sort of stuff. Dr Weidmann should get out more.


In fact, they all should get out more. My recommendation is that the EU elites hire a bus for a month and go to Spain and Greece and some of the French towns where huge housing estates are located and check out what their policies are breeding.

They would find, although I am sure they wouldn’t admit it, a seething, deprived and angry cohort which is growing and will become a force for lawlessness and societal instability.

All courtesy of the common currency – which has been such a success after all.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.

This Post Has 23 Comments

  1. France & especially its corporations has seen a massive concentration of remaining capital in the homeland at the expense of Greece and other nations.
    French fixed capital formation is not that far behind Germany for example…..meanwhile fixed capital expenditure of the PIigs (Imperial markets) which was mainly spent on housing ,roads etc has collapsed.

    The Euro is a capital unit of a account and not a state money of account.
    Its in the narrow corporate interest of the French & Germans to continue the extraction until all blood is drained from the victim.
    Why else build such overcapacity in French public transport ?
    Much of this expenditure is via PPP systems and does not show up on the fiscal books.

    I imagine at some point the French will reintroduce the franc & inflate but only in the narrrow interests of its banks & corporations.
    The systems they are building now will then capture the new flow.

  2. There is one sense in which Barroso is arguably right to say “the EU has come through the worst of the crisis”. It’s that the PURPOSE of imposing deflation on the periphery, namely to bring about an internal devaluation, is actually working.

    At least according to a recent editorial in the Financial Times, Greece has regained two thirds of the competitiveness it needs to regain. Plus Spanish exports are doing well.

    What the Eurozone needs to do is sit down and think about whether there are not some better ways of effecting internal devaluation than five years of austerity. Personally I’d favour an enforced wage, price and profit cut in uncompetitive countries.

    That would be difficult to do, but the prize if it can be made to work is a big one: no need for 5 years of austerity when a country becomes uncompetitive.

  3. + A simple explanation why Irish Youth unemployment is not at Greek or Spanish levels.

    One of the reasons why Irish youth unemployment is lower then in Spain is that the birth rate in Ireland reached new lows in the early ,mid 1990s
    The domestic Irish women were having less kids back then.

    Just type in under one year , all sexes and all years.
    The estimated number of kids under one year reached a low of 48.2 thousand in 1995 rather then the current 70+ thousand.
    The 1995 group are now leaving school.

    This current high birth rate is chiefly a result of external workers which came into the country during the boom – these are generally workers in the 20s to 30s age group …….prime child bearing years.

    Now type in the 15 to 19 group (all ages and years)

    This Irish age group is back down to 1972 -73 levels.

    Please note that these numbers may seem small but of course in % terms these are the biggest rise and fall seen in euro area birth rates by a wide margin.

  4. A interesting Irish economic paper by John Fitzgerald

    The Effect of Redomiciled Plcs on GNP and the
    Irish Balance of Payments

    But like all such papers it does have political consequences.

    “There is also a corresponding implied adjustment needed in the official current
    account figures, as shown in Table 2. This would imply that, instead of having a
    current account surplus of around 6.1 per cent of GNP in 2012, the underlying
    surplus was closer to 0.6 per cent of GNP.
    When these undistributed profits or retained earnings are taken into account, it
    makes a big difference to the headline numbers for Ireland for 2012. A current
    account surplus of close to 6 per cent of GNP would imply that there was 4 | Quarterly Economic Commentary – Spring 2013
    considerable scope for domestic demand to increase in the future, once
    deleveraging ends. However, if the true figure is closer to 0.6 per cent of GNP the
    scope for such an increase in domestic demand in coming years is more limited.”

    This is a very narrow way of looking at things.

    We live in a world without final settlement.

    Global rent flows into London and other financial capitals……
    The people with claims on so called sov debt , now private utilities & other more sophisticated methods of extraction burn real resources at others expense.

    Under a national currency domestic demand should be a domestic affair and nothing else.

    The level of capture by global rentier forces is truly astounding.

  5. @Erik Jochem

    Against the U.S. I would say. Certainly that’s the thrust of Lagarde’s comment a couple of weeks ago, that the U.S. should not be tightening up fiscally. The Torika expect American consumers to be buyers of last resort, as they have been for decades.

  6. @Ralph

    There is another solution, much more rational in my opinion: Get out of the f***ing Eurozone!

  7. Erik Jochem,

    My answer: the Euro periphery became uncompetitive as compared to the core.

    Ben Johannson,

    Lack of competitiveness of one Eurozone as compared to another has to be dealt with via internal devaluation. As to the US, that’s outside the EZ, so if the EZ as a whole is uncompetitive in relation to the US, than that can be dealt with by devaluing the Euro relative to the US dollar: much easier than internal devaluation.

    Alex Hanin,

    You could be right: abandoning the Euro might be the best option. I just feel that the last five disastrous years are a very short episode relative to the history of Europe, and it would be a pity to abandon an attempt to make Europe’s economy more efficient just because that attempt turns out to have major teething problems.

  8. Dear Ralph (at 2013/05/16 at 18:36)

    Once again you should check your facts. In terms of real effective exchange rates, if we index at January 2007 = 100, then by the middle of last year (latest data) Germany is at 96.9, Ireland at 93.2, Greece at 104.1, Spain at 101.7, France at 99.0, Italy at 103.3, Cyprus at 103.4, Netherlands at 98.7, Portugal at 98.9 (and UK is at 86.9) – Eurostat data available at:

    A rising RER means loss of competitiveness. So please explain how all that pain that Greece, Spain, Italy etc are going through has improved their international competitiveness. That is not true in absolute terms nor relative to Germany, France and the Netherlands.

    Certainly Ireland has been different and to a certain extent, Portugal.

    best wishes

  9. @Ralph

    You say 5 years as if the crisis was over, which seems very optimistic to me.

    I don’t think Europe has “teething” problems. The whole thing is flawed and won’t work properly anytime soon.


  10. This is why Irish people don’t get it……….

    A typical reaction to a report about income inequality or equality depending on your viewpoint or job.

    “BeeCeeTee Says:
    May 16th, 2013 at 11:14 am
    Looks like evidence, for the doubters, that Ireland really does have the most progressive direct taxation / transfers system in the OECD.

    I wonder if there is anything in the idea that we have exceptionally high direct income inequality precisely because (benchmarked against other OECD countries) we have provided large subsidies to people on low incomes for perhaps the last 10 or 15 years?”

    But the income from the rentiers on the inside is built on sand.
    You see the Irish rational domestic economy no longer exists , those people working in it were put out to pasture to service the “new economy”

    It was taken apart beginning in the late 70s /early 80s.

    Its the guys who write for the Irish times or who lecture in UCC who get paid the big bobs.
    The poor fellows who take out your trash (the industry has been recently liberalized ) who get paid minimum wages.
    But the trash guys are the fellows which do the useful work.

    The transfers have been used to keep domestic demand up to a certain minimum level…… was not a altruistic function of the banks which control the state.

    Essentially the entire Irish economy is a large Special purpose vehicle.
    It has no rational center.
    Its a absurd little place full of absurd little people.

  11. gastro george,

    The Bank of England, in order to increase reserves in the banking system, must “purchase” high quality securities and other financial assets from those banks. In order to exit QE and reduce the quantity of reserves it must “purchase” the reserves with the securities and financial assets it originally removed. The purpose of selling the bonds back is solely to drain excess reserves. If the BoE were to destroy the bonds it would not be able to swap out the reserves.

    Does that make sense?

  12. Even if they do sell at a loss, wouldn’t they then need to sell even more bonds to make up the loss in terms of draining the required amount of reserves then there is the matter of the billions of interest on thise bonds that has already found its way back to the treasury. The whole thing seems ridiculous.

  13. Gastro George, I completely agree. I’d be amazed if QE was ever reversed. I guess they will simply hold onto the bonds until they mature. The only way they will now keep interest rates up is by paying interest on reserves. Paying interest on reserves renders the reserves into behaving in a way almost indistinguishable from short term treasury debt anyway. I’m not sure whether it would even be possible to meaningfully reverse QE by selling bonds. If they tried, then my guess is that all the bonds would be sold off and -because the bonds were sold for less than they were bought with- there would STILL be a glut of bank reserves.
    I guess we used to have increases in interest rates as a brake on the economy -ensuring that unemployment prevents labour taking a share from return on capital. Now we will have spikes in commodity prices being the brake on the economy.

  14. @Ben Johannson

    “If the BoE were to destroy the bonds it would not be able to swap out the reserves.”

    How about creating more bonds? In theory the BoE is separate from government, but who gave them the money to but the bonds in the first place?


    “I guess they will simply hold onto the bonds until they mature.”


    We seem to be in an Alice in Wonderland situation, where the debt is some immense problem, but yet the BoE owns 40% of it. What is the real meaning of this? The elephant in the room seems to be that the debt has already been monetised, with no apparent ill effects – certainly not the runaway inflation that the goldbugs envision. Yet orthodoxy says that the bonds must be sold back into the market … for fear of what?

  15. gastro george

    The way it works in most (if not all) countries with central banks is that power to issue bonds is invested in the Treasury, which is required to issue them in direct proportion to its deficits. So under current (self-imposed) constraints, there is a limit to how many can be in existence and when the can be created. Note that the BoE can still manage liquidity and interest rates by paying out interest on reserves, the bonds just give it a little more precision in the process.

  16. In theory the BoE is separate from government, but who gave them the money to but the bonds in the first place?

    The BoE is the monopoly issuer of reserves. It doesn’t require any funding to conduct its normal operations. What typically happens is that primary dealer banks are required to bid on all Treasury auctions. The central bank ensures the dealers have more than sufficient reserves to take down the entire auction. The reserves “gained” from the auction are then transferred to the Treasury’s reserve account at the central bank, where it can use them for spending operations. The central banks can then, if it chooses, purchase those securities on the secondary market, which is how it executes QE and other open market operations.

    What people call the “bond market” is simply an arm of the central bank used to circumvent the self-imposed constraint preventing it from buying those Treasuryies and directly funding Treasury operations.

  17. Bill,

    Interesting figures. I’m now more pessimistic about the Euro surviving. Plus I’m writing to the FT to ask where they got their figures about Greece’s alleged improvement in competitiveness from.

    Best wishes, Ralph.

  18. The only reason the periphery seems more competitive is because:
    a) BoP is shifting, because no one is buying shit in the periphery as no one has money (consumption of external goods reduced). Literally, everyone is becoming poor, no matter what your income bracket is (unless you are uberwealthy MAYBE).
    b) ULC are dropping, because wages are deflating, and secure/well-paid employment is being destroyed.

    Real competitiveness can NEVER improve in a deflating environment (ie. more efficient and productive), because for that you need to spend money, investing in fixed capital formation, education, infrastructure, etc. The EU is destroying the little progress made during the bubble years with it’s neoliberal policies to “improve competitiveness”.

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