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Looking to the north for a remedy

france.gif As growth in France remains to be sluggish coupled with a structural uemployment rate of near 10% it is time for a solution to bring the big country at the heart of Europe back on track also in the long term -  reforms are needed. The big question is: What kind of reforms?

In their effort to reboost their economy French politicians and analysts have on several occasions invoked the Scandinavian economic model of flexible labour markets and a high service (flexicurity) as the possible cure for the French economy. But what is the Scandinavian model and can it help France at all?

Once again the Neweconomist and Edward Hugh from AFOE serve as my point of reference; see this post by Neweconomist.  The real treat however is this post by Neweconomist where the Nordic model is well summarized as well as this EPC working paper brought to us by Edward Hugh. As a Danish business with a French bug I am sure you will understand me.

The original source of the discussion is this article from Le Monde talking about whether France can imitate the Swedish  economic model. The article describes the Nordic model very postively ...

"Le modèle scandinave est le seul à la fois juste et efficace en Europe, selon l'économiste André Sapir (notre chronique du 23-24 octobre). Le modèle anglo-saxon est efficace, mais inéquitable, le modèle franco-allemand est équitable, mais inefficace (trop cher), et le modèle latin est à la fois inefficace et inéquitable. Le choix est donc de glisser soit vers l'anglo-saxon, soit vers le nordique."

However, the article also describes how the Nordic model is not easily imitable because of the Scadinavian countries' distinguishness.   

"Copier la Suède, est-ce possible ? Deux objections sont formulées. La première tient à la petite taille de ce pays de 9 millions d'habitants, comme des pays scandinaves en général. L'esprit de la "maison commune" est très ancré. Surtout, 80 % des salariés sont syndiqués auprès de l'unique centrale, LO, qui est habitée par une volonté de consensus. Rappelons qu'en France, les syndicats, divisés par une permanente course à la surenchère, ne représentent que 8 % des salariés.

L'autre objection est celle de l'état d'esprit. Domine en Scandinavie un puissant "esprit civique" qui rend le modèle intransposable dans un pays comme la France, selon l'économiste Pierre Cahuc."

Is the Scandinavian model the solution for France then ... ? 

The answer could be both yes and no. The idea of importing the economic ideas of another country implies an easy solution to a very complex issue and I for one don't believe that. Having said that, there are some things France could learn from the Scandinavian countries but those issues have as much to do with French distinguishness as it has to do with the virtues of the Nordic model. 

One example is the labour market where zealous French unions are still affirming the right to only work 35 hours a week - this does not create jobs! See my post on Hewlett Packard in France for a mirror of this. Another example is the almost institutional anti-capitalist sentiment in the French society which I have reported on several times - See posts here and here.

France cannot rely on some Nordic model to come to the rescue bringing prosperity and wealth. And even if cherry picking the economic virtues of the Scandinavian countries would indeed be a solution, France has some issues to deal with which  cannot be remedied by the cross-national transfer of economic ideas.  


A smart move by Trichet and the ECB?

032a8fd7dc5373.jpg As the European Central Bank chooses to raise the interest rate by a quarter percent it is fair to ask why? The large European economies are still showing really sluggish growth signs so the reason cannot be found here. The other plausible reason is that the ECB is trying to establish its credibility as a central bank keen on keeping inflation at bay.  However don't take my word for it - read this article from the Economist which provides a good overview.

"The bank is trying to establish its credibility as an inflation hawk, but this may be hard to do without endangering the fragile recovery in some of the euro zone’s biggest economies."

So, is the ECB trying to navigate in too narrow waters here? It could seem so. A raise in the interest rates albeit a very small one probably won't have any actual effect but markets and consumer confidence in especially France and Germany are volatile so the effect might in the end be real enough in terms of thwarting a growth that is yet really to pick up.

And then there is the inflation. True, the ECB target of 2% has been exceeded by 0,4 percent at the end of the year but the question still remains of why and how a raise of 0.25% could be merited. If it is to show financial stakeholders that an inflation target is not to be joked with the strategy this is a very narrow point of view and many other of the ECB stakeholders would rather want it the other way around.

"Mr Trichet has to worry not only about the markets, but also about the politicians and interest groups who are vehemently opposed to any tightening. In the days leading up to the rate rise, bankers joined trade unions and business leaders in complaining that higher interest rates would endanger the slow recovery and throw people out of work."

In my opinion though, it would be fair to cut Mr. Trichet and the ECB some slack. Managing the financial condition of 25 very diverse countries is not an easy task and trade-offs are bound to show their ugly face. The real dilemma as also reported by the Economist is that growth rates are very different across the eurozone ... what to do?

"This presents the ECB with an unappetising choice: slow down the fragile recovery in economies like Italy’s, or run the risk that more robust countries will overheat. (...) Its biggest economies are burdened with a number of structural flaws, in particular rigid labour markets. Ill-fitting monetary policy exacerbates these but it does not cause them, and it cannot fix them"

This post by the Neweconomist also serves as a good hub for the dicussion of the ECB's dilemmas as well as this post at AFOE by Edward Hugh


What the new socialist program would do for France?

As the socialist party in France re-elects their current leader Francois Hollande for the fourth consecutive time it is fair to ponder what it means for the Socialists in France and the French society in general.

See article from NouvelObs.

Well, currently the effects cannot be seen but if the Socialists can claw back the Presidency in 2007 the French society and Europe in general might be in for a turret time. Let us re-capture what happened at the Parti congress in Le Mans. To give a brief round-up it is apparent that the PS (Parti Socialiste) took a major to the left with the agreed common program - the first since 1990. Particularly Laurent Fabius emerges from the Le Mans meeting as a strong presence. He is the dissident who lead a fraction of socialist no-voters against the official party line during the referendum of the now dead and buried EU-constitution.

"The (socialist) programme would renationalise Electricité de France, the power utility, partly floated this week; raise the minimum wage; abolish flexible two-year job contracts; and boost overtime pay for working more than 35 hours. On the EU, the party has fudged matters, calling for a federal Europe that is both “more political and more social”."

See article from the Economist - walled for non-subscribers.


Now, I ask whether the points and actions above would have a positive effect on the French society.

My answer is NO, and the decided program surely shows that the socialists in France are out of pace with the reality they live in. The ideas as they were presented at the Le Mans congress are a mirror of anti-globalisation and -capitalism and those kinds of views will do France no good. 

The article from the Economist reports how the socialists' program reflect the general anti-capitalist mood. Perhaps this is indeed true but surely not all French politicians can abide to the program as it is presented above.

As I have reported on several occasions in this blog, France will only emerge as the economic pressence it should rightly be if the politicians realize that the strategy of closing its borders, keeping rigid leviathans businesses on state hands and caving in to unions' demands are left as a strategy of yesterday. 

Perhaps dirigism should be revived with a zeal of globalization and capitalism ?