Adé au savoir-vivre francais ?

"It is evil crystallized in unjust social structures..."

..."In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile....is defenseless before the interests of a deified market..."

(Pope Francis, Evangelii Gaudium, paras 59 and 56)

In October of last year, I reported about the evil empire's renewed attack on Germany in an attempt to install Agenda 2020. To prevent the negative connotation to the much maligned Agenda 2010, they named the new agenda "Chance 2020". Yet, it's still the same old supply-side agenda that clearly caters to the global investor and employer community (currently assembled in Davos ---> more on this in my next post), with a focus on reductions of labor and labor-related costs.

Last week, following a massive PR campaign against France (see here, here and here), including a (misre-) presentation by ECB president Draghi (see here) and a downgrade of the country's credit rating by Standard & Poors (the rating company that assigned AAA-ratings to toxic asset portfolios just before the Great Financial Crash of 2008), France's president Francois Hollande finally surrendered. During a press conference at the Elysée palace on January 14, president Hollande announced several measures that will reduce labor costs and labor-related costs for employers to improve France's competitiveness. Framed as a "responsibility pact", employers are expected to create jobs for the young, the elderly, and other target groups in return for lower labor charges, including:

- a  €30 billion cut in social security charges paid by firms for family welfare, starting in 2014;
- another €50 billion cut in unspecified public spending in 2015-2017, of which at least €18 billion are to be cut in 2015, €18 billion in 2016 and €14 billion in 2017.

With the exception of the job creation aspect, the announced measures represent nothing else than the synthetic (competitive) devaluation approach pioneered by Angela Merkel in 2007, "combining an increase in VAT from 16% to 19% with a cut in employers' social security contributions from 6.5% to 4.2%....designed to lower unit labor costs, the standard measure of competitiveness, and thus increase exports." (see my post of February 2013 in which I mentioned that a similar strategy was being planned in France: "And what about Germany's synthetic competitive devaluation strategy ?") 

The post explains what I mean by 'synthetic' devaluation:

"Just as financial instruments can synthetically replicate risk exposures and generate similar returns as other financial instruments without the need for real assets, economic policies can be designed in such a way as to attain the same effect as a competitive currency devaluation without the need to change nominal currency values. For example, a combination of higher value added taxes (VAT) on consumer goods and a cut in payroll taxes or a payroll tax subsidy lowers unit labor costs and lowers export prices as export goods are exempt from VAT. This fiscal devaluation approach has recently been advocated by Harvard economist Gita Gopinath and colleagues as a response to the loss of competitiveness in the eurozone (see Gopinath et al., 2011: "Fiscal Devaluations") and is now being planned in France to revive the country's competitive edge. Keeping nominal exchange rates unchanged, the recommended combination of policies acts as an effective export subsidy and thus leads to the same outcomes as a nominal currency devaluation, namely an increase in exports". 

In Germany, the combination of fiscal devaluation with the labor cost-lowering Agenda 2010 measures were so successful that the country went from a trade deficit in the early 1990s (as a result of the economic boom following reunification) to huge export surpluses in nearly every year since 2000. However, what is not mentioned by Germany's competitiveness gurus is the fact that the synthetic devaluation approach also resulted in huge current account imbalances within the eurozone and thus has substantially contributed to the euro crisis.

If France employs a similar strategy now, it will not only increase the eurozone's trade surplus and thus subtract from desperately needed global demand but, through its labor cost-lowering policies, it will provide another downward thrust toward the dangerous deflationary spiral already at work in the Southern periphery of the eurozone. Using fears of failing competitiveness and high public debt levels to advance an ideological agenda, the evil empire is playing a dangerous game indeed.