Larry Elliott on Macron's problem

An interesting little example of how entirely sensible commentators can fail to see the implications of their own observations. Larry Elliott observes that Emmanuel Macron should be thinking about more than just supply side reforms of France's labour market. He's right, of course:

And that’s because the assumption is that all France’s problems stem from structural rigidity and the lack of labour market flexibility rather than from inadequate demand. The classic neo-liberal diagnosis is that the French state is too big and needs to be pared back through significant cuts in spending. Likewise, the French unions are too powerful and the unemployed need to price themselves into jobs by working harder for lower wages.

This has been the standard explanation of France’s economic woes ever since the abandonment of Keynesianism in the early 1980s. The abiding economic orthodoxy has held that low inflation should be the sole aim of macro-economic policy and should be achieved through control of the money supply; that fiscal policy - changes to tax and spending - is ineffective; and that the economy is a self-adjusting mechanism that will revert to full employment provided prices and wages are flexible.

France, in other words, was not giving up anything of real value when it joined the single currency because all that was required was for the European Central Bank to keep inflation low and for politicians in Paris to embark on meaningful structural reform.

The Keynesian take on France, by contrast, would be that adjustment to shocks tends not to be automatic but comes through the use of all the main economic levers: interest rates, the exchange rate and fiscal policy. The failure to deploy all these weapons explains why growth in the 12 original members of the eurozone averaged 3.4% a year in the 1970s and 0.1% between 2009 and 2015.

That is, rather, to assume that economic policy which I think is good policy is therefore Keynesian policy. Using the exchange rate, for example, is a standard part of any IMF program to pull a country out of the doldrums. And it was Milton Friedman's entirely correct critique of the euro before it even started, that the design did not allow the use of the exchange rate to cushion change. He didn't predict Greece or Finland or Italy specifically, but did point out the general point that when an asymmetric shock hit then not being able to use the exchange rate meant that the only solution would be that internal devaluation.

Or as we can also put it, only supply side policy.

But leave that niggle aside and consider what is really being said here. France has problems different and specific to that country, not entirely shared with other eurozone members. The solutions lie in being able to vary the interest rate, the exchange rate and fiscal policy - quite possibly with some supply side work as well. But interest and exchange rates are specifically blocked off by euro membership in its very essence, while the surrounding rules strictly limit fiscal policy.

Thus it is the rules of the euro itself which limit the room for action, leaving only that supply side policy available. Which is where we get to the implications of the observations. If that is the diagnosis, as Elliott thinks it is, then the solution is for France to leave the euro.

Or, of course, as Friedman said it was and some of us have been shouting for two decades, the euro is a bad idea and it should never have been started. The solution is therefore for everyone to leave it.