It’s the economy stupid – this is why Le Pen won

I have argued it again and again – the continued crisis in the European economy is the primary source of political radicalisation, populism, extremism and outright fascism.

The French regional elections provided yet another sad testimony to that thesis. Here is the one-graph version of that idea.

Le Pen

The graph shows the support for the extremist/populist anti-immigration party Front National (FN) against the unemployment rate across different regions in France. Each dot represents a region.

The simple regression ‘model’ shows that a 1%-point increase in unemployment increases support for FN by nearly 5%-point.

So it might be that FN is helped by the recent terror attacks in Paris and by the ‘refugee crisis’, but this is mostly about a weak French economy.

So if you want to blame anybody for the electoral success of Front National you should point the fingers at Jean Claude Trichet who as ECB-chief in 2011 hiked interest rates twice and at president Holland who has done everything to worsen the already bad competitive position of the French economy since he became president in 2012.

HT: This post have been inspired by a post on the same topic on Bloombergviews by .


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Hollande’s Danish spectacles – Is France the next trouble spot in the euro zone?

This is from the Telegraph:

François Hollande has been urged to drop his new dark-rimmed Danish designer spectacles for ones “Made in France”, with Gallic makers saying his choice is unpatriotic at a time when the government is promoting home-grown products.

Domestic spectacle makers saw red when they discovered two weeks ago that their Socialist president had exchanged his old French rimless glasses for rectangular, retro Scandinavian ones.

The directors of a company called Roussilhe, near Nantes, western France and employing 35 people, decided to send him a pair of similar specs “but 100 per cent made in France” with a label guaranteeing proof of origin.

The pair came with a letter in which the bosses fretted about the “intense international competition” they faced, the need to “bolster local savoir-faire” and “to retain our jobs after two decades of layoffs”.

“By wearing our glasses, you will become an ambassador of French spectacles around the world,” they wrote.

Mr Hollande, whose office pointed out that the lenses of his current glasses are in fact French and only the frames foreign, reportedly phoned the company no sooner had he read the letter and offered to buy another pair of their sunglasses for the summer on the spot.

A second French company then waded in, with Sabine Begault Vagner from Orleans sending him a “pretty pair of blue and red rectangular glasses”. The Elysée rang her too, saying the president would use them as his spares.

The “spectacle affair” emerged on the day that Arnaud Montebourg, France’s flamboyant economy minister was due to unveil his “roadmap for French economic recovery”, including a plan to create “tamper-proof” secret codes on tags for wine, foie gras and other local products to promote “le Made in France”.

Besides irking French spectacle makers, Mr Hollande’s change in glasses has triggered furious debate among political observers over their symbolism.

Jacques Séguéla, the advertising guru, said the new glasses were “final proof of his reformist coming of age”.

It is rumoured that the Danish Prime Minister recently had a glass of French red wine. There was no public uproar over that in Denmark.

But given this story it is hard not to think why France will not be the next euro zone country to get into (renewed) trouble…



A clean break with Hollande (A lesson for Piketty)

Over the past week we have had reports of the deteriorating state of public finances in France and particular the drop in tax revenues. It seems like Hollande’s steep tax increases are not bringing in any extra revenue. President Hollande has been hit right in the face by the Laffer curve.

This is from (it is not exactly news – the story is six days old):

The French government faces a 14bn-euro black hole in its public finances after overestimating tax income for the last financial year.

French President Francois Hollande has raised income tax, VAT and corporation tax since he was elected two years ago.

The Court of Auditors said receipts from all three taxes amounted to an extra 16bn euros in 2013.

That was a little more than half the government’s forecast of 30bn euros of extra tax income.

The Court of Auditors, which oversees the government’s accounts, said the Elysee Palace’s forecasts of tax revenue in 2013 were so wildly inaccurate that they cast doubt on its forecasts for this year.

It added the forecasts were overly optimistic and based on inaccurate projections.

The figures come a week after French Prime Minister Manuel Valls, who was appointed in March following the poor showing of Mr Hollande’s Socialists in municipal elections, appeared to criticise the president’s tax policy by saying that “too much tax kills tax”.

The failed policies of Mr. Hollande have reminded me of an excellent quote from Bernard Connolly’s great book “The Rotten Heart of Europe”:

“Mitterand had spoken of ‘making a clean break with capitalism’. Capital immediately decided to make a clean break with him: funds flowed out of France at a dizzy rate in the days following his triumph”

Yesterday, I finished reading Thomas Piketty’s Capital in the twenty-first century. In the book he is advocating a global tax on capital – indicating a capital gains tax in excess of 80% would be preferable. This is the kind of policies that Mitterrand tried and failed with and that Hollande is now trying again.

What strikes me is that neither Mitterrand nor Hollande had any idea about how economic incentives work. And frankly speaking when I read Piketty’s book then my main take away was exactly the same – Piketty doesn’t seem to understand incentives. It is social planing or engineering rather than economics.

The state of the France economy would be so much better if French policy makers studied the real great French economists – Jean-Baptiste Say and Frédéric Bastiat – rather than Thomas Piketty.

Mr. Hollande the fiscal multiplier is zero if Mario says so

 The newly elected French president Hollande’s rallying cry has been “Yes to growth and no to austerity”.

While I am certainly is no Keynesian (I my readers know that very well…) and my gut instincts are (very!) fiscally conservative I have some sympathy with what Hollande is saying. While I strongly believe that Europe needs massive structural reforms to bust productivity growth in the longer run I also believe that the present crisis has very little – if anything – to do with the lack of structural reforms. The crisis in Europe has nothing to do with tax evasion in Greece, rigid Italian and Spanish firing and hiring rules or an overly generous French pension system. These are all massive problems that need to be addressed, but they are not the causes of the crisis. The crisis is primarily a result of the massive drop in nominal GDP, which we have seen in the euro zone since 2008. And that problem can only be solved by the ECB moving towards a much easier monetary policy stance. There is no way around this.

While I have sympathy for Mr. Hollande’s concerns about the direction of economic policy in Europe I nonetheless think that his analysis of the situation is seriously flawed. Mr. Hollande fully well knows that no government, company or household in the long run can spend more money that it earns. This is simple mamanomics – my mom always used to tell not to spend more money than I earn. This is not economic Calvinism, but simple economic law. That said, how much revenue the French government brings in is crucially dependent on the level and growth of nominal GDP.

Mr. Holland understands this, but he is wrong when he seems to believe that you can increase nominal GDP by boosting public spending. Said in another way the fiscal multiplier is zero.

Lets imagine that we get a Hollande style European “growth pact” which dictates that fiscal policy will have to be eased by 5% GDP in all euro zone countries. Imagine then that this miraculously does not have any negative impact on market sentiment and that increases NGDP by lets say 2% across the euro zone. Hollande would be happy, but would the ECB also be happy?

We most assume that the ECB thinks that nominal GDP in the euro zone is exactly where it should be right now – neither too high nor too low – otherwise the ECB would have done more to boost NGDP. Hence, if Mr. Hollande is able to able to increase the euro zone NGDP by 2% then the ECB would be in a situation where it would face an level of NGDP which would be too high for its liking and as a consequence it would have to move towards a tightening of monetary policy. Hence, the ECB will always have the final word on the level of NGDP – no matter what Mr. Hollande thinks. This is why I have earlier argued that there really is no such thing as fiscal policy – at least in way Keynesians traditionally think about fiscal policy. Fiscal policy cannot on its own increase NGDP. Only the central bank can do this.

You might object and say that ECB does not think that the NGDP level is where it should be. Well, if that is the case then the ECB tomorrow can increase NGDP to exactly the level it want. There are numerous ways to increase NGDP and if you think that the central bank cannot do it then you might want to consult Gideon Gono.

So yes, Mr. Hollande is right when he says that we desperately needs growth (in NGDP) in the euro zone, but he is wrong if he think that it can be achieved by increasing the budget deficit in France or anywhere else in Europe. Only Mario Draghi and his colleagues in the ECB can increase euro zone NGDP.

At the core of Mr. Hollande’s failed analysis is that he is doing “national accounting economics”. He starts out with a national accounting identity: Y=C+I+G+NX. As a consequence he think he by increasing government spending (G) can increase GDP (Y). Had he instead started out with the equation of exchange (MV=PY) then he would have realised that recessions are always and everywhere a monetary phenomenon and that the fiscal multiplier is zero.

I am sorry for sounding like a broken record, but it is saddening and frustrating that nearly no European policy makers realise that at the core of our problems is an overly tight monetary policy and the crisis cannot be solved by more austerity nor can it be solved by a more expansionary fiscal policy. Neither the Keynesian nor the Calvinists are right. It’s not about fiscal policy. It is about monetary policy and if Ralph Hawtry, Gustav Cassel or Milton Friedman were alive they would scream it at you!

PS Maybe British Prime Minister David Cameron is the European leader who comes closest to understanding the need for monetary easing to solve the European crisis. See Britmouse’s excellent comment on Cameron’s recent speech on the UK economy.

Maybe Jens Weidmann and Francios Hollande should switch jobs

There seem to be two main positions on how to solve the European crisis. One represented by Bundesbank chief Jens Weidmann and that is that monetary policy should not be eased anymore and fiscal policy needs to be tightened (this is the Calvinist position). The other position is held by the new French president Francios Hollande who wants to spur European growth by easing fiscal policy (this is the keynesian position)

I would claim that both positions are wrong. At the core of the European crisis is rising public debt ratios in Europe. The public debt ration (d) is defined in the following way:

(1) d=D/NGDP

Where D is public debt in euros and NGDP is nominal GDP.

Anybody with rudimentary monetarist insights would inform you that D is determined by the fiscal authorities, while NGDP is determined by monetary policy (remember MV=PY).

If you want to stabilize or reduce d then you have to either decrease D and/or increase NGDP. So what you basically need is fiscal tightening and monetary easing.

Unfortunately Weidmann is basically arguing for reducing NGDP and Hollande is arguing in favour of increasing D. Both positons will lead to an increase in d and hence worsen the crisis. Hence, it would be better if the two gentleman switched jobs  – at least mentally. It would be a lot more productivity if Weidmann argued for monetary easing and Hollande argued for fiscal consolidation. That would do the job and the crisis would come to an end fairly fast.

Between the need for fiscal tightening and the need for increasing NGDP I have no doubt that it is much more important to increase NGDP. The public debt ratios in Europe has not primarily increased because fiscal policy has been eased, but because NGDP has collapsed. In that sense the crisis is not a debt crisis, but a monetary crisis.


Note to the two gentlemen:

To President Hollande (The keynesian): Fiscal policy cannot increase NGDP. Recommend reading: There is no such thing as fiscal policy

To Bundesbank chief Weidmann (The Calvinist): Monetary policy is a panache and it can increase NGDP as much as you like it to be increased. Recommend reading: “Ben Volcker” and the monetary transmission mechanism

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