Tuesday, November 12, 2013

S & P downgrades France: What François Holland needs to do now

In a bid to raise French deficits, the rating agency, Standard's and Poor's has reduced France's rating to AA. The impact of this is that interest on government debt will rise, especially that taken at variable interest rates. This rise in interest payment will offset any reduction in public spending that the Finance Minister, Pierre Moscovici could have proposed. Such deficits and increased interest rates are pleasing to  those who earn more money as a result (guess who gives loans to the government?).

The key French problems highlighted by S & P (with our comments in brackets) are
1.       Too high taxes already and unwillingness to pay more (don't we agree?)
2.       Too much unemployment (it's a social choice: some relax so that others can work…)
3.       Too much debt: over 80% of GDP (unnecessary political handouts)
4.       Lack of reforms in product, services, and labor markets (unclear vision of the future, present)
5.       Lack of medium term growth prospects (this is S & P's obsession, not ours)
6.       A trade deficit of $ 5.8 million (poor tax choices).

Besides reducing social security charges on employers, the Holland government seems to be clueless on what to do.

Should we give them advice or should we let them sink? Being realistic, we do not think that our party can be in a position to make changes directly today. And if these changes are not made, it may be a bit late.

A simple first lot of suggestions for Mr. Holland would be to do the following. These suggestions could also be taken by the Greeks, the Spanish, the Portuguese and any others who may want them.
1.       Increase the VAT on manufactured goods to 25% and VAT on services to be reduced to 15%.
a.       Services are provided locally and this boosts employment
b.      Goods are often imported and this will finance the reduction on VAT on services.
c.       Note, Scandinavian countries are on a 25% VAT and doing quite well.
d. Germany, who for decades was on a 15% VAT finally got wise and increased its VAT to 19% a few years ago.

2.       Alternative/ variant of above would be to increase the VAT on manufactured goods to finance the reduction on social security charges of employers.
a.       Again, following the Scandinavian model
b.      You are welcome to have your own model, but if it doesn't work, try copying someone who is respectable.
c.       There is nothing wrong with French productivity: its just the wrong taxes which are making the French seem less productive.
d. Note when Germany increased its VAT rate to 19%, it used a part of the increased taxes to reduce social security charges on employers.

3.       Reduce / eliminate all subsidies to business. Yes, including subsidized employment
a.       These subsidies are only postponing the problem.
b.      Solve these problems today.

4.       Share work: reduce the working week to 32 hours (4 days of 8 hours each).
a.       With seven working days, this provides a half-day overlap on each side for people to communicate to each other. Otherwise, with six working days, there can be a two day overlap (one on each side).
b.      To set an example, François Holland needs a co-President. And this should go all the way to the bottom, for every minister in the country.
c.       When everyone has jobs, effective demand will go up, public destruction will go down, the spirit of solidarity would increase.
d.      Managers who cannot manage people in a 32 hour week should be made redundant and replaced by managers who can. Appropriate training courses can be provided by schools such as the Burgundy School of Business to redundant managers.

5.       Postpone retirement: If France has insufficient people, retirement age should be increased unilaterally to 65 with no obligation to retire till 70.
a.       An opt out could be allowed for health reasons.
b.      The retirement age increase works only if there are enough jobs. So, it has to be part of the integrated 32 our week.

6.       Exclude Germany and Scandinavia from European Union or form a closer circle of Social European Union with similar legislation on minimum wages.
a.       Germany and Scandinavia, with no minimum wage, do not have the same social democratic concerns as the rest of Europe. If they don't care about their own poor, they certainly won't give two hoots for Greeks, Spanish or French. (Note: these countries do not have a national minimum wage, but they have sectoral agreements; but not everyone is covered by sectoral agreements).
b.      The alternative would be to scrap France's own minimum wage and behave like Germans. I don't think the French are ready for this, despite Standard and Poor's desires.
c.       The German trade surplus and lower prices in Germany for French goods, clearly indicate that lack of minimum wages are what is keeping German industries competitive. (The Germans are indeed talking of introducing a minimum wage of 8.5 Euros per hour, significantly lower than in France, but then again one doesn't know when the talk will lead to a walk).

7.       Scrap all subsidies to illegal immigrants. France has immigration laws on one hand and it provides subsidies to those who violate these laws. Either change the laws or stop providing incentives to violate the laws.

8.       Encourage micro and small scale local industries by providing infrastructure necessary for them to succeed.

The problem with François Holland is that he will promise these for his second mandate rather than do this for 1st of January 2014. By then, he may be captain of a ship that has already sunk.If the Spanish, Greek or Portuguese react faster, they may give him lessons which he may not be willing to take from us directly.


  1. I told you so!

    According to the news below, François Holland will review the entire taxation system and act only if he is reelected a few years from now for another five years.


    Chirac bis, I guess. Do nothing, Be happy.

  2. So much for M. Ayrault's complete reform. Here is his ten point program.


    Let it remain in French: its not worth translating. Cosmetic changes, although useful, are not going to usher in competitivity. So, it may follow his social(ist) agenda, but certainly not make a dent in trying to improve France's rating.