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ORIGINAL FRENCH ARTICLE: L’austérité coûte cher à la croissance, selon l’OFCE

by Kevin Boucaud

Austerity Costing Dearly in Terms of Economic Growth, According to French Economic Observatory

Translated Wednesday 12 November 2014, by Gene Zbikowski

The organization is forecasting continued slow economic growth in France and in the euro zone among its economic perspectives, and believes that the problem stems from the budgetary policies that are being followed.

The French Economic Observatory (OFCE), an independent and publicly-funded center established as part of the French Fondation nationale des sciences politiques, presented its economic perspectives for the euro zone and France on Oct. 29. The perspectives for France are not very cheerful, mainly due to the budgetary austerity imposed by the government.

According to Xavier Timbeau, the director of the department of analyses and forecasts, for the past five years France has experienced “the sharpest budgetary consolidation in her history.” Eric Heyer, the deputy director of the department, explains that the budgetary policy “is the main brake on economic growth at present.”

The institute forecasts 0.4% growth for 2014 and 1.1% growth next year, on condition that France not be forced to greater austerity by the European Commission. The continuing fall in investment (down 2.2% this year and down 1.6% next year), which is due to the pursuit of the reduction in investment by the government, is the main brake on economic activity. Austerity has a negative effect in two ways.

The first way is direct: lowering government expenditures has a recessive effect. The authors of the study also think that the negative impact of tax hikes for households is greater than the positive impact of lowering social security contributions for companies. Hence French tax policy harms growth.

But austerity also has an indirect effect. Considering that austerity is being practiced by all the European countries – some of which are practicing severer austerity than France – it is compressing demand in the whole euro zone. Thus the fall in demand in a country that is a partner of France’s is harmful to French companies that export. On this subject Eric Heyer states (going against the tide of the French government and the MEDEF, the main association of French bosses) that “French companies are not constrained on the supply side, but in fact on the demand side.”

To back up what he says, the economist points to a study of company bosses who were asked if they could produce more without hiring and investing more. It appears that companies could produce a lot more without hiring and could produce a little more without investing… This outcome shows that if companies are not producing more, it is because their order book is not full enough. In 2014, the restrictive budgetary policy was thought to cost France 1.2% of gross domestic product, 0.8% directly and 0.4% indirectly, due to foreign demand.

Unfavorable causes and effects

Austerity is not the only thing having an unfavorable effect on the French economy. The OFCE also points out the negative effect of the rise in oil prices. But this has a very small effect, since it only cost 0.1% in growth in 2013, and the effect of oil prices should be nil both this year and in the coming year, according to the forecasts.

Price competitiveness is also lowering gross domestic product through two mechanisms: the rise in the value of the euro (which should, however decrease next year vis-à-vis the dollar) and the competition from other European countries with lower social costs, which are pursuing severer austerity policies, which is leading to a fall in wages.

The monetary policy also poses a problem. The rates of interest that households and companies must pay to the banks are too high.

Be that as it may, the OFCE points out that potential economic growth is still negative and hence that “it isn’t a problem of structural reforms,” as Eric Heyer explains.

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