The French Cul de Sac

This article provides a view of economic and politival problems in France from the perspective of a UK economist. The fiscal problem in the eurozone (EZ) has only two effective solutions which are ruled out: full blown EZ union, or the abandonment of the euro. Consequently, some sort of transfer union will be used to muddle through the crisis. The transfer union comes with an imposition of austerity, and financial markets are also demanding austerity. This will slow down internally generated EZ growth that will not be compensated for by growth in exports. This leads us the the cul de sac in France.

Budget deficit reduction is being promised by both of the mainstream candidates. The goal is to balance the budget, net of interest payments, by 2014. Sarkozy proposes structural reforms and tax cuts for employers while raising the VAT. Hollende proposes raising taxes on the wealthy and on big business, along with a stronger transfer union to preserve the euro. They both face the problem, however, of an economy that is sliding into a recession. That will make it impossible to balance the budget by 2014, and lead to further retrenchment. This will open the door for the far right and the far left. Both are in favor of an EZ exit and the use of protectionism to deal with domestic economic problems. This will test the willingness of the public to make sacrifices in order to preserve the common currency.