[Economics] Budget Dispute in France - The Euro-Crisis and its Origins have never disappeared

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[Economics] Budget Dispute in France - The Euro-Crisis and its Origins have never disappeared

In France the prime minister has changed again. And there is currently much discussion about the budget dispute and France's national debt. However there is a lack of explanation for the causes of the budget deficits and the growing national debt in France. This article will explore the connection to the euro crisis and the causes behind it.

France

The French economy is indeed facing problems. But these problems are only partly France's responsibility. Just as in other countries private households in France are saving a portion of their income. But the rest is far from normal.

The fiscal balances describe the difference between revenue and expenditure of a sector over a period of time usually one year. The sectors are the general government, the sum of domestic private households, the sum of domestic companies and the foreign trade of that economy as a whole. Consequently it is a flow variable and not a state variable. Surpluses mean savings by the sector and thus the sector in question is withdrawing demand from the economy. Deficits mean the sector is incurring debt and thus the sector in question is supplying demand to the economy.

The corporate sector meaning the sum of all companies has long been either a saver or a neutral sector. This is bad because it means the corporate sector is no longer fulfilling its role as a debtor for investments. But this development is the case in most countries around the world. France has a foreign trade deficit with other countries. Consequently France has import surpluses or export deficits. This leads to a permanent flow of demand and money abroad. The government is therefore faced with the challenge of balancing out the savings of private households, the corporate sector meaning the sum of all companies and the foreign trade deficit. The French government must therefore run budget deficits of a corresponding size to avoid causing a recession.

[1, UVGD] [1, UBCABOP] [1, UBLC] [1, UBLH] [1, UBLGE]

The French government is nevertheless not threatened by insolvency as governments have unlimited creditworthiness. On the one hand it is at most secondary whether companies or the government borrow for economic growth. Interest is then directly included in pre-tax prices or in taxes. However the problem of the foreign trade deficit remains. The high budget deficits and growing national debt in France are therefore a logical consequence. In the end someone in France always has to borrow to the amount of future savings and nominal economic growth. This also applies to negative values but in that case a recession is inevitable.

Currency-Union

Overall the Eurozone is characterized by trade imbalances. But most countries have trade deficits. And only a few countries have trade surpluses.

[1, UVGD] [1, UXGS] [1, UMGS]

This development can be explained by the development of unit labor costs and the monetary union. The key to a monetary union is the abolition of exchange rates. Consequently countries no longer have the option of adjusting their foreign trade balances through revaluation or devaluation. Differing price developments therefore lead to goods and services from other countries being favored but displacing local goods and services and consequently jobs.

[1, PLCD]

Prices in turn are determined by wages relative to productivity meaning the unit labor costs. And here it is immediately apparent that Germany's downward trend is much far too. France on the other hand has had an almost ideal development for most of its history. In fact Germany pursued a policy of wage restraint with the Agenda 2010 parallel to the monetary union. This has made Germany overly competitive and thus diverted demand away from other countries. Inevitably Germany has also harmed itself with low wages in the form of working poverty and a stagnating domestic economy. In addition Germany's claims on foreign countries inevitably lose value due to inflation.

The Downward-Spiral

If France were now to attempt to improve its economy's competitiveness by lowering wages it would certainly be plunged into recession. While there are ways to lower wages France would lose more in its large domestic economy than it could gain through its smaller foreign trade. Even in the 2010s problems with the same dynamic occurred in Greece, Spain, and Portugal. And under external pressure real wages were reduced in Greece and Spain while Portugal largely refused to comply.

[1, ZCPIN] [1, UVNT] [1, NLHT]

The outcome of this development is not surprising. Reducing real wages in Greece and Spain has also reduced demand leading to higher unemployment and lower economic growth. Wages are the largest cost for companies and at the same time the largest source of income for other. Portugal on the other hand has resisted the reduction in real wages and consequently performed better.

[1, ZUTN] Reales Wachstum

[1, OVGD]

Conclusion

France has a problem. But the cause cannot be found in France just as France is not responsible for it. France has not done anything wrong itself but is being trapped in a monetary union where coordination failed. High budget deficits and growing national debt are inevitable for countries with trade deficits if they do not want to force a recession. Reducing real wages in France is not a solution. Instead wages must rise in Germany.

Src:
[1] AMECO database
https://economy-finance.ec.europa.eu/economic-research-and-databases/economic-databases/ameco-database_en