The Plot Against France

[frigidmagi]

NYTimes Opinion

On Friday Standard & Poor’s, the bond-rating agency, downgraded France. The move made headlines, with many reports suggesting that France is in crisis. But markets yawned: French borrowing costs, which are near historic lows, barely budged.

So what’s going on here? The answer is that S.& P.’s action needs to be seen in the context of the broader politics of fiscal austerity. And I do mean politics, not economics. For the plot against France — I’m being a bit tongue in cheek here, but there really are a lot of people trying to bad-mouth the place — is one clear demonstration that in Europe, as in America, fiscal scolds don’t really care about deficits. Instead, they’re using debt fears to advance an ideological agenda. And France, which refuses to play along, has become the target of incessant negative propaganda.

Let me give you an idea of what we’re talking about. A year ago the magazine The Economist declared France “the time bomb at the heart of Europe,” with problems that could dwarf those of Greece, Spain, Portugal and Italy. In January 2013, CNN Money’s senior editor-at-large declared France in “free fall,” a nation “heading toward an economic Bastille.” Similar sentiments can be found all over economic newsletters.

Given such rhetoric, one comes to French data expecting to see the worst. What you find instead is a country experiencing economic difficulties — who isn’t? — but in general performing as well as or better than most of its neighbors, with the admittedly big exception of Germany. Recent French growth has been sluggish, but much better than that of, say, the Netherlands, which is still rated AAA. According to standard estimates, French workers were actually a bit more productive than their German counterparts a dozen years ago — and guess what, they still are.

Meanwhile, French fiscal prospects look distinctly nonalarming. The budget deficit has fallen sharply since 2010, and the International Monetary Fund expects the ratio of debt to G.D.P. to be roughly stable over the next five years.

What about the longer-run burden of an aging population? This is a problem in France, as it is in all wealthy nations. But France has a higher birthrate than most of Europe — in part because of government programs that encourage births and ease the lives of working mothers — so that its demographic projections are much better than those of its neighbors, Germany included. Meanwhile, France’s remarkable health care system, which delivers high quality at low cost, is going to be a big fiscal advantage looking forward.

By the numbers, then, it’s hard to see why France deserves any particular opprobrium. So again, what’s going on?

Here’s a clue: Two months ago Olli Rehn, Europe’s commissioner for economic and monetary affairs — and one of the prime movers behind harsh austerity policies — dismissed France’s seemingly exemplary fiscal policy. Why? Because it was based on tax increases rather than spending cuts — and tax hikes, he declared, would “destroy growth and handicap the creation of jobs.”

In other words, never mind what I said about fiscal discipline, you’re supposed to be dismantling the safety net.

S.& P.’s explanation of its downgrade, though less clearly stated, amounted to the same thing: France was being downgraded because “the French government’s current approach to budgetary and structural reforms to taxation, as well as to product, services and labor markets, is unlikely to substantially raise France’s medium-term growth prospects.” Again, never mind the budget numbers, where are the tax cuts and deregulation?

You might think that Mr. Rehn and S.& P. were basing their demands on solid evidence that spending cuts are in fact better for the economy than tax increases. But they weren’t. In fact, research at the I.M.F. suggests that when you’re trying to reduce deficits in a recession, the opposite is true: temporary tax hikes do much less damage than spending cuts.

Oh, and when people start talking about the wonders of “structural reform,” take it with a large heaping of salt. It’s mainly a code phrase for deregulation — and the evidence on the virtues of deregulation is decidedly mixed. Remember, Ireland received high praise for its structural reforms in the 1990s and 2000s; in 2006 George Osborne, now Britain’s chancellor of the Exchequer, called it a “shining example.” How did that turn out?

If all this sounds familiar to American readers, it should. U.S. fiscal scolds turn out, almost invariably, to be much more interested in slashing Medicare and Social Security than they are in actually cutting deficits. Europe’s austerians are now revealing themselves to be pretty much the same. France has committed the unforgivable sin of being fiscally responsible without inflicting pain on the poor and unlucky. And it must be punished.

When we were downgraded due to Congress acting like small children, the impact was... Nothing noticeable. In fact the interest rate on our bonds is so damn good, it's more like people are paying money for the privilege of loaning Uncle Sam money then the reverse.

And now we see this happening with France. So I am left to ask...

Are these credit ratings really reflective of reality? Should I really gives a damn?

[Lys]

The article is pretty much spot on. For years now we've had people crowing about the need for fiscal responsibility and the need for austerity, deregulation, and the dismantling of social safety nets. Yet what we keep seeing is that the countries that do what they say get fucked worse, and the countries that don't do better. It's politics and ideology, with silly things like facts being ignored because they don't care. Look US interest rates are so low that it's actively stupid not to be borrowing as much as we can and investing it. If we can get as little as 2% return on investment, we come out ahead, but instead you have Congress insisting on cutting spending more and more, with basically no evidence that this does anything except cut the deficit, as if cutting the deficit is axiomatically a good thing, which it isn't. If your return on investment exceeds the interest rates on your deficit spending you lose money by cutting the deficit. These past few years are a great missed opportunity for a wave of infrastructure refurbishment and expansion that would have benefited the United States decades down the line, but no let's instead act like managing a country's finances is the same as managing your family's finances.

Meanwhile, in Europe you have the French refusing to get on the austerity boat because, why should they? Everyone else who got on it is now drowning, because it's a shitty boat that doesn't actually float. So the French decided to not get onboard, and if they look at their own finances they can see that they're shit works is projected to continue working just fine down the line. But the folks who are ideologically committed to slashing taxes, spending, safety nets, and governments in general won't stand for that, so they all say doom and gloom about how France will be fucked if it doesn't embrace austerity. Just the same as they doomed and gloomed about the US, and yet if anything is going to cause the US to implode, it's the very people who want severe cuts in spending!

Also, no, those credit ratings do not reflect reality. In fact the credibly of rating agencies has been suspect at best ever since all those AAA rated real estate securities turned out to be crap and caused the financial crisis in the first place. Given that nothing seems to have happened after they *gasp* downgraded the US and France, clearly the people actually lending out money don't give a damn.