Money for Nothing in France

By Henri Erti. Originally published on 2013/04/20

Liberté, égalité, fraternité. The famous motto to presumably epitomize the correct model and stage of societal and economic development. Admittedly, a great portion of the Western world owes their success and progress to this powerful ideology. However, today’s France under the leftist leadership captained by President Francois Hollande has taken the premise of égalité to another level. Consequently, history may remember Hollande’s reign differently: as a time of fiscalité, misere, faillite.

Results or Intentions?

In 1975 Milton Friedman famously said, ” One of the great mistakes is to judge policies and programs by their intentions rather than their results.” Evidently, in 2012 France decided to think the opposite when Francois Hollande was elected as the 24^th President of France. By promising glamorous policies to improve the conditions of the poor and middle-class at the expense of the wealthy, the majority of France mistakenly believed in utopian intentions, rather than in economic realities. Today a sense of remorse and urgency has arrived to France[1], where a large part of citizens have grown to enjoy unaffordable social services promised by the inept Hollande administration. Of course the promises of Hollande were only part of the traditional political game, but even by European standards the level of socialism in Hollande’s policy proposals has been overwhelmingly unpragmatic.

Spending Other’s Money Is Easy

Out of many Hollande’s unreal policies, the 75% upper level income tax rate has been by far the most disturbing penalty for the wealthy. Even though such tax would not affect many households or individuals, it was nevertheless a troublesome sign of where the French political idealism is heading. Furthermore, anti-business rhetoric combined with lunatic taxation policies came to be seen as an invitation to a duel against businesses. As a direct result from Hollande’s discrimination against businesses, France’s economic growth estimate was reduced from the initial 1.3% to 0.8% and later on to actual decline of growth in 2013. Consequently, France won’t achieve its 3% deficit reduction goal, meaning that public sector spending would remain at 56% of GDP. Financing public sector services with more debt despite the shrinking pool of taxable income will further increase the deficits to levels far beyond the Maastrict Treaty requirements. Therefore, by looking at these numbers it is needless to further analyze the trajectory of France’s economic competitiveness. If France’s nemesis and the European growth engine Germany has a minuscule 0.8% growth forecast in 2013 with more disclipined monetary and fiscal policies than in France, Hollande is going to have more nightmares than fantasies about economic recovery.

Au Revoir Depardieu

Allthough the Constitutional Council rejected the 75% income tax due to its unconstitutional character, the damage has already been done. Data from the Banque de France illustrated how capital flight increased rapidly after Hollande revealed his egalitarian plans to rearrange the French economy. Capital outflows resulted in net-losses of 53 billion Euros, which exacerbated the contraction of M1 and further escalated the nervousness of the markets both in France and EU. Unemployment rate naturally increased, putting stronger pressure to the short-term sustainability of the unemployment benefits. After all, investing to social security services requires larger pool of taxable income and Hollande’s policies are discouraging foreign investors to bring vital capital to France, which could improve the employment, hence expand taxable incomes. It is all together more puzzling to search the rationality from such policy when the overall revenue collected with the 75% income tax would had been 300-500 million Euros. Such amount would not have made much improving contributions to the chronic public deficits. On the contrary, the public finances have become even more crippled. Therefore, it seems the intention of such lunatic policies was to score political points and encourage public discord between classes rather than improve the distribution of wealth.

добро пожаловать Depardieu

Why won’t the adherents of socialism never learn from their mistakes? Such fanatics of state-controlled economy falsely hold on to the Scandinavian-model and argue how their mistakes were the consequence of being taxed too little. Unfortunately, the Scandinavian-model works only in homogeneous nations with strong trust to the government, but France has neither of these attributes. In order to revitalize the French economy people need to wake up to reality and understand how the phrase c’est la vie no longer applies in a world where somebody else has to pick up the tab from the choices of others. Especially when the Euro has integrated European economies to a single market area, where the results of one nation’s hard work can be diminished by other’s choice to live off the system. In conclusion, if Paris Saint-German has any desires to beat Real Madrid or Manchester United in the Champions League next year, Hollande must lower income taxes so that great players (Ibrahimovic & Beckham are not such) would find it profitable to work in France. Currently, nobody feels this way apart from the socialist government.

[1] http://www.economist.com/news/europe/21571900-elected-left-frances-president-seems-be-veering-towards-centre-which-way-mr

Author serves as the EST Ambassador to Croatia and is a graduate student at Dubrovnik International University.