France decides to Spend! Spend! Spend!

Yesterday brought something that was both new and familiar from France. The new part is a substantial extra fiscal stimulus. The familiar is that France as regular readers will be aware had been pushing the boundaries of the Euro area fiscal rules anyway, This is something which has led to friction with Italy which has come under fire for its fiscal position. Whereas France pretty much escaped it in spite of having its nose pressed against the Growth and Stability Pact limit of 3% of Gross Domestic Product for the fiscal deficit. Actually that Pact already feels as if it is from a lifetime ago although those who have argued that it gets abandoned when it suits France and Germany are no doubt having a wry smile.

The Details

Here is a translation of President Macron’s words.

We are now entering a new phase: that of recovery and reconstruction. To overcome the most important in our modern history, to prevent the cancer of mass unemployment from setting in, which unfortunately our country has suffered too long, today we decide to invest massively. 100 billion, of which 40 billion comes from financing obtained hard from the European Union, will thus be injected into the economy in the coming months. It is an unprecedented amount which, in relation to our national wealth, makes the French plan one of the most ambitious.

So the headline is 100 billion Euros which is a tidy sum even in these inflated times for such matters. Also you will no doubt have spotted that he is trying to present something of a windfall from the European Union which is nothing of the sort. The money will simply be borrowed collectively rather than individually. So it is something of a sleight of hand. One thing we can agree on is the French enthusiasm for fiscal policy, although of course they have been rather less enthusiatic in the past about such policies from some of their Euro area partners.

There are three components to this.

Out of 100 billion euros, 30 billion are intended to finance the ecological transition.

As well as a green agenda there is a plan to boost business which involves 35 billion Euros of which the main component is below.

As part of the recovery plan, production taxes will be reduced by € 10bn from January 1, 2021, and by sustainable way. It is therefore € 20bn in tax cuts of production over 2021–2022.

That is an interesting strategy at a time of a soaring fiscal deficit to day the least. So far we have ecology and competitiveness which seems to favour big business. Those who have followed French history may enjoy this reference from Le Monde.

With an approach that smacks of industrial Colbertism

The remaining 35 billion Euros is to go into what is described as public cohesion which is supporting jobs and health. In fact the jobs target is ambitious.

According to the French government, the plan will help the economy make up for the coronavirus-related loss of GDP by the end of 2022, and help create 160,000 new jobs next year.  ( MarketWatch)

Is it necessary?

PARIS (Reuters) – French Finance Minister Bruno Le Maire believes that the French economy could perform better than currently forecast this year, he said on Friday.

“I think we will do better in 2020 than the 11% recession forecast at the moment,” Le Maire told BFM TV.

I suspect Monsieur Le Maire is a Beatles fan and of this in particular.

It’s getting better
Since you’ve been mine
Getting so much better all the time!

Of course things have got worse as he has told us they have got better. Something he may have repeated this morning.

August PMI® data pointed to the sharpest contraction in French construction activity for three months……….At the sub-sector level, the decrease in activity was broad based. Work undertaken on commercial projects fell at the
quickest pace since May, and there was a fresh decline in civil engineering activity after signs of recovery in June and July. Home building activity contracted for the sixth month running, although the rate of decrease was softer than in July. ( Markit)

We have lost a lot of faith in PMi numbers but even so there is an issue as I do not know if there is a French equivalent of “shovel ready”? But construction is a tap that fiscal policy can influence relatively quickly and there seems to be no sign of that at all.

Indeed the total PMI picture was disappointing.

“The latest PMI data came as a disappointment
following the sharp rise in private sector activity seen
during July, which had spurred hopes that the French
economy could undergo a swift recovery towards precoronavirus levels of output. However, with activity
growth easing considerably in the latest survey period,
those hopes have been dashed…”

So the data seems to be more in line with the view expressed below.

It is designed to try to “avoid an economic collapse,” French Prime Minister Jean Castex said on Thursday. ( MarketWatch)

Where are the Public Finances?

According to the Trading Economics this is this mornings update.

France’s government budget deficit widened to EUR 151 billion in the first seven months of 2020 from EUR 109.7 billion a year earlier, amid efforts to support the economy hit by the coronavirus crisis. Government spending jumped 10.4 percent from a year earlier to EUR 269.3 billion, while revenues went down 6.3 percent to EUR 142.25 billion

I think their definition of spending has missed out debt costs.

As of the end of June the public debt was 1.992 trillion Euros.


I have avoided being to specific about the size of the contraction of the economy and hence numbers like debt to GDP. There are several reasons for this. One is simply that we do not know them and also we do not know how much of the contraction will be temporary and how much permanent? We return to part of yesterday’s post and France will be saying Merci Madame Lagarde with passion. The various QE bond purchase programmes mean that France has a benchmark ten-year yield of -0.18% and even long-term borrowing is cheap as it estimates it will pay 0.57% for some 40 year debt on Monday. That’s what you get when you buy 473 billion Euros of something and that is just the original emergency programme or PSPP and not the new emergency programme or PEPP. On that road the European Union fund is pure PR as it ends up at the ECB anyway.

The Bank of France has looked at the chances of a rebound and if we look at unemployment and it looks rather ominous.

However, the speed of the recovery in the coming months and years is more uncertain, as is the peak in the unemployment rate, which the Banque de France forecasts at 11.8% in mid-2021 for France……….Chart 1 shows that in France, Germany, Italy, and the United States, once the unemployment rate peaked, it fell at a rate that was fairly similar from one crisis to the next: on average 0.55 percentage point (pp) per year in France and Italy, 0.7 pp in Germany, and 0.63 pp in the United States.

There is not much cheer there and they seem to have overlooked that unemployment rates have been much higher in the Euro area than the US. But we can see how this might have triggered the French fiscal response especially at these bond yields.

But Giulia Sestieri is likely to find that her conclusion about fiscal policy is likely to see the Bank of France croissant and espresso trolley also contain the finest brandy as it arrives at her desk.

Ceteris paribus, the lessons of economic literature suggest potentially large fiscal multipliers during the post-Covid19 recovery phase

Mind you that is a lot of caveats for one solitary sentence.

19 thoughts on “France decides to Spend! Spend! Spend!

  1. I remember someone else saying they would “spend spend spend” seems a long time ago now and those oldies on here will remember Viv Nicholson who wont the pools jackpot in 1961.

    However to be fair to the French, the world is in a deep hole and if spending produces growth that is a different matter; but I don’t think any country who has been affected by the pandemic has a proper handle on the situation at the moment.

    Back in the UK I see the strongest hint yet of negative interest rates from Saunders who it would appear has been seeking divine intervention.

    Bank of England policymaker Michael Saunders noted on Friday that he is not “theologically opposed” to negative interest rates and noted that they haven’t yet finished the review on them.

    “Negative rates review will look at indirect effects on banks and lending,” Saunders further added. “The UK banking system has a high share of deposits so negative rates might produce more of a squeeze on margins for banks.”

  2. Hello Shaun,

    It doesn’t suprise me in the least that France gets preffered status in the EU as they regard it as their project. The Franco-German empire as I have sometimes called it . To tame Germany and use it as the work horse – do the Germans mind? I dont know.

    Any stimulus is wasted if SARS2 keeps the EU economies in lockdown or keeps going in and out of one.

    its a trap for sure.


  3. Well there isn’t any point in capturing the ECB if you don’t use it.
    The French tend to be quite good at shovel-ready big infrastructure projects.
    But goodness knows where the ‘green’ spend is going to be made, nowhere that improves efficiency or productivity that’s for sure.

    • Isnt it just a case that all this extra printing goes directly into the economy to create inflation as opposed to sitting on bank balance sheets.

      The green line is just their woke excuse to get the money out there.

      As for £100bln being a tidy sum … is it? as i truly have no idea if that is a lot of money for govts of this sized economy these days. I remember the uproar about £700mln being spent on the Millennium tent, the govt were torn apart for years for such spending; now spend a billion over 13 days giving £10 off at restaurants and its cheered on with the sum being ignored!

      (and wages werent much lower in 2000 compared to 2020 in the real private sector)

  4. Jean-Baptiste Colbert – 29 August 1619 – 6 September 1683
    His most famous quotes seem particularly appropriate today,

    The first for our Ivory Tower dwellers:
    “It is simply, and solely, the abundance of money within a state which makes the difference in its grandeur and power.”

    The second for every Chancellor and their Government:
    “The art of taxation consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing.”

    • Hi Colin

      I like the second quote especially as like all musings on the human condition nothing has changed at all there.

      He was reviewed favourably back when I studied that period of history. Indeed French economic policy has been influenced by him ever since. As a mercantilist he would be happy to see Silver’s recent rally to US $27.

  5. Barnier: We must ‘ave agreement on were ze UK can or cannot subseedise indoostree in order to ‘ave a level playing field.

  6. Some of the oldies on here will remember Viv Nicholson who said she would “spend spend” ater winning the pools in 1961.

    But to be fair to France they are trying to create jobs, however I don’t think any country has a proper handle of the current financial crisis exacerbated by the pandemic.

    In the meantime BOE Saunders has given the strongest hint of possible negative rates in the UK, they are not just “in the tool box” they are being examined to see how effective they would be:

    Bank of England policymaker Michael Saunders noted on Friday that he is not “theologically opposed” to negative interest rates and noted that they haven’t yet finished the review on them.

    “Negative rates review will look at indirect effects on banks and lending,” Saunders further added. “The UK banking system has a high share of deposits so negative rates might produce more of a squeeze on margins for banks.”

    • Hi Peter

      That was an odd comment from Michael Saunders as even somewhere like the ECB does not have negative interest-rates as a religion. Also the Bank of England “lower bound” estimate which was 0.5% and is now 0.1% confirms that it thinks the banks cannot take negative interest-rates.

      I do remember my grandfather doing the pools. He lived by the Borough and if I was there on a Saturday evening I would go and get a copy of the paper ( Evening News I think) for him so he could check his scores. It was amazing how quickly they were printed and for sale……

  7. It looks like fiscal expansion would be the only way out of this mess, given the failure of monetary policy, not least as the euro is rising with negative rates. Typically French, they will go overboard about it, but I am sure the end results will be very stylish.

    Fiscal expansion is of course basic Keynesianism, but Keynes advocated it at the bottom of a recession under normal rate conditions. It is supposed to have a multiplier, being the reciprocal of the marginal propensity to save post-tax income, thereby creating demand throughout the economy, as Bob le Builder goes off for his wine and Gauloise. So, the problem is obvious -taxes will have to rise and people are saving more in a climate of worry, plus of course housing costs. So would e100bn make much difference to a e2,000bn economy? If 40% disappears in tax and the MPS were 10% plus increased housing costs, probably it will be nothing more than un pis dans la meer.

  8. “It looks like fiscal expansion would be the only way out of this mess, . . . ”
    Not according to prof. R. A. Werner?
    “ . . . whereby the coefficient for ∆g is expected to be close to –1. In other words, given the amount of credit creation produced by the banking system and the central bank, an autonomous increase in government expenditure g must result in an equal reduction in private demand. If the government issues bonds to fund fiscal expenditure, private sector investors (such as life insurance companies) that purchase the bonds must withdraw purchasing power elsewhere from the economy. The same applies (more visibly) to tax-financed government spending. With unchanged credit creation, every yen in additional government spending reduces private sector activity by one yen. “
    “Equation (22) indicates that the change in government expenditure ∆g is countered by a change in private sector expenditure of equal size and opposite sign, as long as credit creation remains unaltered. In this framework, just as proposed in classical economics and by the early quantity theory literature, fiscal policy cannot affect nominal GDP growth, if it is not linked to the monetary side of the economy: an increase in credit creation is necessary (and sufficient) for nominal growth.
    Notice that this conclusion is not dependent on the classical assumption of full employment. Instead of the employment constraint that was deployed by classical or monetarist economists, we observe that the economy can be held back by a lack of credit creation (see above). Fiscal policy can crowd out private demand even when there is less than full employment. Furthermore, our finding is in line with Fisher’s and Friedman’s argument that such crowding out does not occur via higher interest rates (which do not appear in our model). It is quantity crowding out due to a lack of money used for transactions (credit creation). Thus record fiscal stimulation in the Japan of the 1990s failed to trigger a significant or lasting recovery, while interest rates continued to decline. ”

    Click to access Werner_IRFA_QTC_2012.pdf

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