The chart below makes a comparison between current GDP dynamic in France and out of recession dynamic seen during the previous recession at the beginning of the 90’s. This comparison is often done in France. The point is to say that after a poor start at the beginning of the 90’s, French growth became stronger. The point is to say that the French economy will currently do the same.
The two profiles are very different. Currently GDP is still below its pre-crisis level. This was not the case in the 90’s where it was more than 5% above. In the 90’s the recession came from twofold: Disequilibrium that led to the European Monetary System (EMS) crisis in the last quarter of 1992 and German Unification. At this time the global environment was supportive and adjustments inside the EMS area were currency devaluations. This type of measure can be put in place very rapidly and change competitiveness in the hour. So Italy and Spain made deep devaluation of their currency, British pound exited and in summer 93 EMS rules were changed with larger fluctuation bands.
We cannot have such adjustment currently. The global environment is less supportive (world trade momentum is low, well below its historical average). As Euro is the target (and it is the good target) this means that improvement in competitiveness has to be done differently than with a currency devaluation. Its internal devaluation with lower costs (labor costs, social costs) that are put in place. But it takes time and to avoid a new period of disequilibrium new institutions have to be build. This has started with all that has been done since last summer (more cooperation within the treaty of governance, ECB that can become lender of last resort). This new institutional framework must help to compensate the slow motion of adjustments.
But before that these internal devaluations become efficient, that structural reforms are put in place (to make the economy more efficient and more autonomous) and that these new institutions work efficiently we have to be patient because to be efficient all that will take time
With this in mind, the more fuzzy target on fiscal policy that has been announced by Jean Marc Ayrault, the French prime minister is good news.
Trying to improve the economy and having austerity policy is running two things at once. You cannot reform and rebalanced the economy and at the same time put more constraints as it is the case when you reach rapidly zero public deficit.
You cannot expect people, companies to adjust to a new environment that needs degree of freedom to adopt a new profile, a new trajectory in a changing world and constrain them on financial ground with severe fiscal policies.
What must be put in front on the picture is economic activity, growth and employment. Strict fiscal policies in a weak environment have never been key to success. Having two targets is too complicated to manage. What kind of hierarchy and are these two targets consistent? That’s the kind of question on which we have no answers and this lead to more uncertainty as we’re not able to clearly define a trajectory.
A clear hierarchy will help to focus on the main target (growth), to reduce uncertainty and to help people and companies to extend their economic horizon (necessity to invest). With this in mind then it will be possible to imagine a convergence of the two curves.
With the same simple methodology I have taken into account the 1975 recession after the first oil shock. Recovery was quicker at this moment than during the other two recessions. This shows the specific period we are in.