The last thing we need is a French Eurozone
31 July 2015
SUGGESTED
Economic Theory
30 July 2015
Healthcare
Tax and Fiscal Policy
19 November 2024
The latest episode in the Greek debt drama, which ended with the Greek government’s agreement to undertake much-needed reforms in labour market regulation, tax and pensions in exchange for a third (and yet to be agreed) €86bn bailout from Eurozone creditors, has convinced many that Germany will do whatever it takes to shape the single currency area in its own image. Before we know it, these pundits argue, we will all become penny-pinching, productivity-obsessed Fritzes with no time for leisure and no compassion for our fellow Europeans. Auf Wiedersehen, or rather, auf Nimmerwiedersehen, ‘social Europe’!
Only one man stands in the way of this Teutonic dystopia. Faced with the prospect of continued austerity from Berlin, François Hollande has stepped forward to call for a different Eurozone, namely one based on greater fiscal and social union. What this would mean in practice is, among other things, a harmonised minimum wage and equalised corporate tax rates. And given that Monsieur Hollande has refrained from reforming either during his three years in office, one would assume that he wants them harmonised to French levels.
This would be no small feat: at €1,457.52 per month, the French national minimum salary (SMIC) is among the highest in Europe. Its corporate income tax rate of 33.3% also tops the charts – and that excludes a 3.3% ‘social charge’ and a ‘temporary’ 10.7% surcharge levied on companies with a turnover greater than €250m. (French managers should be reminded of Milton Friedman’s dictum that “there is nothing more permanent than a temporary government programme.”)
It does not take a macroeconomic visionary to predict that such policies would be catastrophic for the Eurozone. Indeed, they have been a disaster for France. Its overall unemployment rate has been stuck at 8-10% since the mid-1980s, suggesting very high structural joblessness due to high minimum wages, burdensome red tape and a labour market that protects some employees while leaving the rest out to dry. Youth employment looks even bleaker, with around a quarter of young French unable to enter the job ladder because their productivity does not (yet) justify the wages mandated by the government. This, ironically, prevents them from gaining the very skills and experience that would enable them to command higher salaries, leaving them stuck with informal petits boulots at best, and nothing to do at worst.
What’s more, French entrepreneurs in all areas of activity, from fashion to high tech, have been flocking to London to avoid the weight of the French state, taking advantage of the ease of setting up a business in the UK, as well as its corporate tax rate of 20% (soon to be lowered to 18%).
The French model is not even working in France. Just imagine what would happen if you took French employment and tax policy and transplanted it to Greece, Italy or Spain, where average worker productivity ranges from 50-80% of French levels and business activity is only now beginning to recover after a prolonged downturn. Young Greeks and Spaniards could say au revoir to the prospect of gainful employment – that is, the half of them who are now able to find work.
So, what makes Hollande – and those who have supported his call – think that it would work for the rest of the Eurozone? If it was bloated governments, reckless spending and heavy regulation that caused, magnified and dragged out the crisis, is more of the same going to entrench the recovery? Common sense says no, but Hollande et al say yes.
There are broadly three categories of Eurozone countries according to how they entered and went through the crisis. There are those such as Germany which reformed spending and welfare policy before 2007 and survived the downturn relatively unscathed. Then there are those which had severe imbalances and structural deficiencies as crisis struck, and have since implemented significant reforms to make their economies more competitive, notably Ireland, Portugal and Spain. Finally, there are those such as France and Greece which remain unreformed and whose economies have therefore failed to recover. The last major Eurozone member, Italy, is somewhere between the second and third categories, as it is belatedly attempting to introduce much-needed product and labour market liberalisations.
If we then look at the relative macroeconomic performance of Eurozone countries, a neat correlation becomes clear. Reformed economies have left the worst of the crisis behind them and are growing at accelerating rates, with unemployment falling apace. Unreformed ones continue to struggle, with GDP growth hovering around 0% and joblessness refusing to buck. Structural reforms of the liberalising variety lower employment and business costs, which makes the private sector more competitive and boosts exports and domestic demand, leading to higher job and growth figures. Indeed, the evolution of unit labour costs across the Eurozone mirrors the improvement in countries’ economic prospects. (Greece has seen falling labour costs only since 2012, but starting from an extremely high level). Reforms matter.
So, a French Eurozone is clearly not the way towards widespread prosperity. What, then, is the model to follow? A few can be offered; two that I’m especially fond of are Switzerland and Sweden. Switzerland is a highly decentralised confederation, where each individual canton can set its own corporation tax rate and where citizens recently rejected proposals for a minimum wage, identifying this misguided price floor for what it is – a crude intervention which shuts the low-skilled out of productive employment. With an open economy and liberalised markets, Switzerland has thrived as the countries around it have floundered.
Sweden also has much to boast about. Its economy is one of the freest in the world, following major reforms in the 1990s to tackle debt travails of its own. It is now easier to hire and fire in Sweden than in most other places in Europe, red tape on business is comparably low, and the private sector has been involved in public education, welfare and social services – something we can only dream of in most of the rest of the continent. Yes, Sweden remains one of the most redistributionist states in the world, but intervention takes place without disrupting market outcomes. This means that, rather than setting a minimum wage, the Swedish government acknowledges economic reality – letting businesses pay workers according to their productivity, and supplementing their income through direct transfers where needed. When compared to other European welfare states, its results are remarkable.
As the Eurozone crisis comes to an end, the greatest danger facing the single currency area is that policymakers will draw the wrong conclusions, seeking to implement Europe-wide what has clearly not worked at the national level. The sad truth is that France, with its dirigiste traditions and inflexible market regulations, is a role model in virtually no area of economic policy. But examples of successful reform are readily available, and France and the rest of the Eurozone would be well-advised to face the facts, and change economic policy accordingly.
Diego Zuluaga is the IEA’s International Research Fellow. A shorter version of this article first appeared on Conservative Home.
Only one man stands in the way of this Teutonic dystopia. Faced with the prospect of continued austerity from Berlin, François Hollande has stepped forward to call for a different Eurozone, namely one based on greater fiscal and social union. What this would mean in practice is, among other things, a harmonised minimum wage and equalised corporate tax rates. And given that Monsieur Hollande has refrained from reforming either during his three years in office, one would assume that he wants them harmonised to French levels.
This would be no small feat: at €1,457.52 per month, the French national minimum salary (SMIC) is among the highest in Europe. Its corporate income tax rate of 33.3% also tops the charts – and that excludes a 3.3% ‘social charge’ and a ‘temporary’ 10.7% surcharge levied on companies with a turnover greater than €250m. (French managers should be reminded of Milton Friedman’s dictum that “there is nothing more permanent than a temporary government programme.”)
It does not take a macroeconomic visionary to predict that such policies would be catastrophic for the Eurozone. Indeed, they have been a disaster for France. Its overall unemployment rate has been stuck at 8-10% since the mid-1980s, suggesting very high structural joblessness due to high minimum wages, burdensome red tape and a labour market that protects some employees while leaving the rest out to dry. Youth employment looks even bleaker, with around a quarter of young French unable to enter the job ladder because their productivity does not (yet) justify the wages mandated by the government. This, ironically, prevents them from gaining the very skills and experience that would enable them to command higher salaries, leaving them stuck with informal petits boulots at best, and nothing to do at worst.
What’s more, French entrepreneurs in all areas of activity, from fashion to high tech, have been flocking to London to avoid the weight of the French state, taking advantage of the ease of setting up a business in the UK, as well as its corporate tax rate of 20% (soon to be lowered to 18%).
The French model is not even working in France. Just imagine what would happen if you took French employment and tax policy and transplanted it to Greece, Italy or Spain, where average worker productivity ranges from 50-80% of French levels and business activity is only now beginning to recover after a prolonged downturn. Young Greeks and Spaniards could say au revoir to the prospect of gainful employment – that is, the half of them who are now able to find work.
So, what makes Hollande – and those who have supported his call – think that it would work for the rest of the Eurozone? If it was bloated governments, reckless spending and heavy regulation that caused, magnified and dragged out the crisis, is more of the same going to entrench the recovery? Common sense says no, but Hollande et al say yes.
There are broadly three categories of Eurozone countries according to how they entered and went through the crisis. There are those such as Germany which reformed spending and welfare policy before 2007 and survived the downturn relatively unscathed. Then there are those which had severe imbalances and structural deficiencies as crisis struck, and have since implemented significant reforms to make their economies more competitive, notably Ireland, Portugal and Spain. Finally, there are those such as France and Greece which remain unreformed and whose economies have therefore failed to recover. The last major Eurozone member, Italy, is somewhere between the second and third categories, as it is belatedly attempting to introduce much-needed product and labour market liberalisations.
If we then look at the relative macroeconomic performance of Eurozone countries, a neat correlation becomes clear. Reformed economies have left the worst of the crisis behind them and are growing at accelerating rates, with unemployment falling apace. Unreformed ones continue to struggle, with GDP growth hovering around 0% and joblessness refusing to buck. Structural reforms of the liberalising variety lower employment and business costs, which makes the private sector more competitive and boosts exports and domestic demand, leading to higher job and growth figures. Indeed, the evolution of unit labour costs across the Eurozone mirrors the improvement in countries’ economic prospects. (Greece has seen falling labour costs only since 2012, but starting from an extremely high level). Reforms matter.
So, a French Eurozone is clearly not the way towards widespread prosperity. What, then, is the model to follow? A few can be offered; two that I’m especially fond of are Switzerland and Sweden. Switzerland is a highly decentralised confederation, where each individual canton can set its own corporation tax rate and where citizens recently rejected proposals for a minimum wage, identifying this misguided price floor for what it is – a crude intervention which shuts the low-skilled out of productive employment. With an open economy and liberalised markets, Switzerland has thrived as the countries around it have floundered.
Sweden also has much to boast about. Its economy is one of the freest in the world, following major reforms in the 1990s to tackle debt travails of its own. It is now easier to hire and fire in Sweden than in most other places in Europe, red tape on business is comparably low, and the private sector has been involved in public education, welfare and social services – something we can only dream of in most of the rest of the continent. Yes, Sweden remains one of the most redistributionist states in the world, but intervention takes place without disrupting market outcomes. This means that, rather than setting a minimum wage, the Swedish government acknowledges economic reality – letting businesses pay workers according to their productivity, and supplementing their income through direct transfers where needed. When compared to other European welfare states, its results are remarkable.
As the Eurozone crisis comes to an end, the greatest danger facing the single currency area is that policymakers will draw the wrong conclusions, seeking to implement Europe-wide what has clearly not worked at the national level. The sad truth is that France, with its dirigiste traditions and inflexible market regulations, is a role model in virtually no area of economic policy. But examples of successful reform are readily available, and France and the rest of the Eurozone would be well-advised to face the facts, and change economic policy accordingly.
Diego Zuluaga is the IEA’s International Research Fellow. A shorter version of this article first appeared on Conservative Home.
SHARE
