The Budget

Taxes will be raised in France. Although the government has emphasized tax increases on high earners (75% on individuals earning more than  €1 million and creation of a new 45% tax bracket), a substantial portion of the increased revenue comes from freezing the current set of tax brackets (that is, not adjusting for inflation), a decision already made by the Fillon government. Call this a subterfuge or not, it extends the effective tax hike to some 36 million individuals. Coupled with spending cuts, this represents a serious contraction of the economy. France may have no choice if it is to keep its borrowing costs in line, but the likelihood is that this budgetary contraction will push France into recession next year. Since similar contractions are occurring across Europe, and since the countries of the EU trade intensively with one another, these national contractions will be mutually reinforcing. It is hard to see how Europe avoids a fairly sharp recession next year, and this may upset the budget calculations of any number of countries, including France.

A wave of layoffs is to be expected. Arnaud Montebourg, the minister of productive reinvigoration (I love that title!), has been ubiquitous on TV since taking office. He seems to be following a strategy pioneered by Sarkozy: nurse one's presidential ambitions by cultivating the media in a ministerial role. He chose discretion yesterday, however, avoiding an appearance at the auto show, where pickets from PSA and Ford loudly lambasted him for his failure to prevent layoffs by their firms. The previous day, however, he was on the spot at Arcelor-Mittal, assuring workers that he would somehow save their jobs. On dirait l'avatar de Sarkozy! Productive reinvigoration evidently does not encompass thought that there might be overcapacity in certain industries (steel and autos, for example), and that France's best course might be to shift capital and labor to other uses. The obvious gap between the government's embrace of austerity and Montebourg's one-man dervish effort to stimulate investment with lots of jaw-flapping but without actual funds is likely to end in embarrassment on both sides. Is Ayrault allowing Montebourg enough rope to hang himself, or is he simply using him as a fig leaf to cover the fact that his government has repudiated Keynes and placed its faith in what Paul Krugman calls the confidence fairy?