\t\t\t\tToday I’ve been following a document trail concerning the French government decision to adopt the so-called Barre Plan in 1976. This is part of the research on doing for my next book on why the Left abandoned progressive economic strategies and became what we now think of as austerity-lite merchants. I am hoping the manuscript will be finished by April 2016 and the book will emerge a bit later in the year. while the approach that will be taking is emerging, the strategy is to pinpoint key events in history where significant economic policy changes occurred and to analyse the rationale that was used to defend those policy shifts and to assess whether the circumstances that applied at those points in time provide any guidance to current day challenges. One of the big events that lead to deep uncertainty among Social Democratic politicians and their advisers, which arguably, was a key driver in the shift of these parties to the Right, was the Stagflation of the 1970s. The phenomenon of the simultaneous coincidence of accelerating inflation and rising unemployment had not previously been witnessed in the period following the Second World War. It needs a careful analysis because much of the popular understanding of this period and the claims that it demonstrated a failure of Keynesian policy approaches are incorrect and provide no basis for rejecting fiscal intervention to maintain full employment.
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Like all research, this project follows a line of thinking, where the line gets thicker and longer the more deeply one ventures into the literature and the data.<\/p>\n
My current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale<\/a> (published May 2015), started out to be a planned manuscript of 200 odd pages but as the research process unfolded it became necessary to tie wider threads together than originally thought pertinent, which increased the size of the final output to 500 odd pages.<\/p>\n That’s why research is fun. Frustration but fun.<\/p>\n While today’s blog is not intended to be a definitive statement on what is a very complex period of history it does offer some of the elements in my current line of thought on this topic.<\/p>\n Let’s start with Raymond Barre, who was a French academic and later became prime minister of France (1976 to 1981). Prior to entering politics he was the vice president of the Commission of the European Communities (1967 to 1972) in addition to his academic role.<\/p>\n His role on the Commission was exemplified by his contribution to the Werner Committee process on economic integration, which reported in 1970.<\/p>\n After the Treaty of Rome 1957, which established the European Economic Community (EEC), there was regular discussion about the need for closer economic cooperation between the Member States.<\/p>\n In February 1969, the so-called Barre Report reaffirmed the European preference for fixed exchange rates and a move to a common monetary policy.<\/p>\n The Europeans were concerned about developments in world currency markets and the depletion of US gold reserves, in the context of the commitment by the US government under Bretton Woods to guarantee US dollar convertibility into gold.<\/p>\n During the 1960s, a large quantity of gold reserves shifted from the US to Europe as a result of persistent US balance of payments deficits.<\/p>\n There was a great reluctance to let go of the fixed exchange rate Bretton Woods system, which had organised international finance since its inception in 1945.<\/p>\n It was obvious that the system was doomed to failure.<\/p>\n The use of the US dollar as a reserve currency exposed the instability of the Bretton Woods system. The economist Robert Triffin warned in the early 1960s that the system required the US to run balance of payments deficits so that other nations, who used the US dollar as the dominant currency in international transactions, were able to acquire them.<\/p>\n In the 1960s, nations started to worry about the value of their growing US dollar reserve holdings and whether the US would continue to maintain gold convertibility. These fears led nations to increasingly exercise their right to convert their US dollar holdings into gold, which significantly reduced the stock of US held gold reserves.<\/p>\n The so-called Triffin paradox was that the Bretton Woods system required the expansion of US dollars into world markets, which also undermined confidence in the dollar’s value and led to increased demands for convertibility back into gold. The loss of gold reserves further reinforced the view that the US dollar was overvalued and, eventually, the system would come unstuck.<\/p>\n The way out of the dilemma was for the US to raise its interest rates and attract the dollars back into investments in US denominated financial assets. But this would push the US economy into recession, which was politically unpalatable. It was also incompatible with other aspects of US government policy, including its War on Poverty and its relentless, anti-Communist militarism (the development of NATO and the prosecution of the Vietnam War).<\/p>\n So already, in the late 1960s, Raymond Barre along with the then French Minister of Economy and Finance (later President) Val\u00e9ry Giscard d’Estaing were shifting away from the traditional French Republican tradition, which eschewed handing over national sovereignty to European level decision making units, towards a line of thinking that was much more compatible with that of the Germans – a emphasis on inflation and monetary integration.<\/p>\n When Giscard d’Estaing defeated Fran\u00e7ois Mitterrand in the 1974 presidential election, it became clear that he would impose his belief in free markets as the solution to international imbalances onto French national policy.<\/p>\n When Giscard d’Estaing appointed Raymond Barre as Chirac’s successor on August 23, 1976, he proclaimed “M. Barre est sans doute le meilleur \u00e9conomiste fran\u00e7ais, en tout cas un des tout premiers” (Mr Barre is without doubt best economist in France at least one of the best!). Barre was also appointed as Minister of Economy and Finance, a position he held until 1978.<\/p>\n The pair promoted a powerful anti Gaullist position with respect to domestic economic policy, reflecting their neo-liberal views, and moved the French perspective on ‘Europe’ closer towards the German ‘economists’ viewpoint.<\/p>\n In his speech to the French parliament upon taking up his role, Raymond Barre devoted a substantial portion to outlying his policy priority – “la lutte contre l’inflation” (the fight against inflation).<\/p>\n He argued:<\/p>\n \nla r\u00e9cession mondiale de 1975 a montr\u00e9 brutalement ce que co\u00fbtent la recherche syst\u00e9matique d’une croissance \u00e0 tout prix et le renoncement aux \u00e9quilibres fondamentaux.\n<\/p><\/blockquote>\n That is, “the 1975 global recession demonstrated what happens when policy seeks growth at all costs and renounces the need for fundamental balances”.<\/p>\n He argued that restoring balance required “d’\u00e9tablir l’\u00e9quilibre budg\u00e9taire et de mod\u00e9rer la croissance de la masse mon\u00e9taire” (“balanced budgets and the moderation of money supply growth”).<\/p>\n He said the priority was to act on prices:<\/p>\n \n… d’abord par leur gel temporaire, puis par la r\u00e9duction de la taxe sur la valeur ajout\u00e9e et une hausse limit\u00e9e des tarifs publics …\n<\/p><\/blockquote>\n That is, “first via a temporary freeze and then reducing VAT and limiting the increase in public tariffs”.<\/p>\n He claimed that it was a priority to maintain an environment where French export competitiveness was enhanete to allow the nation to compete more vigourously with Germany in trade.<\/p>\n He said:<\/p>\n \nL’esprit d’entreprise, c’est pr\u00e9cis\u00e9ment celui qui conduit \u00e0 l’\u00e9mancipation et non pas \u00e0 l’assistance. Il est indispensable \u00e0 notre pays. C’est lui qui doit, notamment, permettre le renforcement de la capacit\u00e9 de notre \u00e9conomie \u00e0 offrir des emplois stables et nombreux, mais il est clair que l’esprit d’entreprise ne peut se d\u00e9ployer si la libert\u00e9 de d\u00e9cision des chefs d’entreprise est par trop limit\u00e9e et si les r\u00e9sultats financiers des entreprises sont insuffisants.<\/p>\n Il nous faut r\u00e9viser \u00e0 ce sujet, et je le dis en toute objectivit\u00e9, une conception du profit qui pr\u00e9vaut trop fr\u00e9quemment dans notre pays. Celui-ci ne saurait \u00eatre le produit de rentes de situation, de privil\u00e8ges ou de subventions de l’Etat, mais le fruit des efforts de productivit\u00e9 et d’innovation. Utilement r\u00e9employ\u00e9, il est la condition pour que les entreprises d\u00e9veloppent leur contribution au progr\u00e8s \u00e9conomique et social.\n<\/p><\/blockquote>\n So free enterprise liberates and is essential for the progress of the Nation. He also articulated the view that French policy regulations restricted entrepreneurship and restrained corporate earnings.<\/p>\n He wanted this to change and to create a policy structure where profits were driven by productivity rather than economic rents, privileges, or state subsidies.<\/p>\n But, it is clear that he led the charge on inflation-first policy innovations, which were characterised by cutting public spending in order to reduce the fiscal deficit, promoting exports and suppressing imports, and ensuring the French currency became stronger against the German mark.<\/p>\n He said that “the fight against inflation is now a prerequisite for national ambitions”.<\/p>\n The ‘Barre Plan’, introduced in 1976 and consolidated in 1977, involved a combination of tax increases on fuel, tobacco and alcohol, wage freezes to fight inflation, fiscal austerity, attacks on trade unions and industrial restructuring, particularly in the steel industry.<\/p>\n His approach exemplified what we now consider to be the neo-liberal way whereby government focused on maintaining a strong currency by suppressing domestic costs.<\/p>\n The focus shifted from regarding the fiscal balance as a reflection of the pursuit of functional ends, such as a strong domestic economy with low unemployment, to one where the balance became an objective in its own right and deficits were vilified.<\/p>\n Barre claimed that harsh fiscal austerity was necessary and that the economy would emerge stronger, with lower unemployment. <\/p>\n The ‘bitter pill now, better future health’ message he preached is strikingly similar to the policies and narratives that remain current today on both sides of the political fence.<\/p>\n His plans were met with strong resistance, not the least because the austerity was targeted at workers, leaving those who could evade taxes and enjoyed high incomes relatively unscathed.<\/p>\n Giscard d’Estaing and Barre thus beat the British Tories under Thatcher by a few years to the questionable fame of being the first Monetarist government along the lines espoused by Milton Friedman and the so-called University of Chicago boys.<\/p>\n But like Thatcherism, the so-called ‘Barrisme’ failed to achieve its stated purpose.<\/p>\n The economy deteriorated just as his Keynesian opponents had predicted. Economic growth came in well under the forecasts. The unemployment rate, which in 1976 was just over 4 per cent, rose to 5.2 per cent in 1978, and by the end of his Prime Ministership it had risen to 7.4 per cent.<\/p>\n Further, inflation was not reduced substantially and the currency continued to depreciate.<\/p>\n One commentator noted on the third anniversary of his Prime Ministership, that after three years of anti-inflation austerity, “Everything is more expensive, even the price of a baguette”.<\/p>\n It is true that the French economy, like much of the oil dependent world, was caught up in the second oil crisis in 1979, after the demise of the Shah of Iran upset oil supplies and world financial markets overreacted by pushing prices up far higher than was warranted by the actual contraction in supply.<\/p>\n But the Barre Plan had failed long before 1979 and the oil crisis just sealed his political fate (along with that of Giscard d’Estaing) and paved the way for Chirac to return.<\/p>\n