Sunday, September 30, 2012

The Left of the Left Demonstrates

The Front de Gauche and allied groups will demonstrate today against the austerity policy that the government of François Hollande has embraced. Their anger is comprehensible. Hollande artfully campaigned on the notion that there was an alternative to austerity. He promised to renegotiate the Merkozy agreement, now respectfully rebaptized the TSCG and erected as a sine qua non of sound government. The gauchistes are also perfectly correct in their analysis of the consequences of austerity: there will be plant closings, business failures, layoffs, and suffering. To all of this Hollande now argues--or, rather, implies--that There Is No Alternative. This is the famous Thatcherite justification for retrenchment. So the only question is whether Hollande's implicit analysis is correct.

So what is the alternative? If France were to try deficit spending, would investors park their money elsewhere and send French borrowing costs higher? This is not absolutely certain. Germany cannot absorb capital indefinitely, and interest rates are already negative. To the extent that investors wish to remain in the euro, France would still be attractive even if it were to diminish the budgetary shock. Hollande seems to be gambling on "shock therapy": if he concentrates all the pain--a shock to GDP of -3%--in his first year, then things will improve over the remainder of his quinquennat. This would be a better bet if Germany were stimulating its economy, but it isn't, nor is anyone else in Europe. Hence the risk is a mutually reinforcing contraction that will steepen the slide and leave everyone in a deeper hole.

Politically, Hollande seems to be tacitly assuming that he can brave the anger from his left, because the left of the Left has no place to go. The Right can cavil, but he is essentially continuing the economic policy of Sarkozy-Fillon and in fact pushing ahead where they were too timid to go. His cuts are deeper, his tax hikes are sharper than the Right dared while it was in power. This is a big bet for an essentially cautious politician like Hollande, and it's not clear where he retreats to if things go wrong. Nor does he have any carrots to offset the lash of his many sticks. The likely outcome is a sharp rise in anti-EU, anti-German, anticapitalist sentiment.

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