France Needs Both Economic Growth And Security
French President Francois Hollande put his European Union partners on notice Monday when he told French lawmakers: "The security pact outweighs the stability pact. France is at war."
Like an accountant gingerly raising the matter of an unpaid bill at a client's funeral, the European Commission gave its verdict on France's budget a day later, declaring the country "broadly compliant," but also warning that France's effort to bring its deficit under control will likely "fall significantly short of the recommended level, according to all metrics."
Nobody would begrudge the French president his desire to ensure that homeland protection receives the required resources, but Hollande posits a false trade-off when he suggests that France's security needs demand fiscal indiscipline. It would be more accurate to say the opposite is true. The state already accounts for 57 percent of the economy and is an impediment to economic growth.
The European Union's Stability and Growth Pact seeks to impose fiscal discipline on members and encourage regulatory and other changes that will encourage growth. While the debt and deficit criteria are of course arbitrary, EU leaders maintain that its enforcement underpins the effectiveness of the single currency:
The Pact is a cornerstone of the EU's economic governance and of decisive importance for the proper functioning of Economic and Monetary Union.
The targets have been ignored more than honored, but with rising debt levels and slow growth across the euro zone, the EU has stepped up its efforts lately to get compliance. France's budget deficit is just under 4 percent of its GDP. While France expects to meet next year's target of 3.4 percent, the Commission said that was only because of better-than-expected growth figures; France will miss its goal to bring the deficit below the 3 percent limit in 2017.
Even so, the government expects to get a waiver under the circumstances. “Europe must understand, and it is time that the European Commission understands too, that this is a fight that concerns France but that concerns Europe too,” said Prime Minister Manuel Valls. France's EU budget targets would be "inevitably overshot" because of new security spending, he said.
It's not clear yet what the extra spending will buy. France's military is already on a war footing. In April, three months after Islamist militants killed 11 people at the offices of the satirical magazine Charlie Hebdo, Hollande announced a nearly 4 billion euro ($4.3 billion) increase in military spending to confront extremist threats. The defense budget of 31.4 billion euros for 2015 was slated to get an extra 3.8 billion euros between next year and 2019. The government halved the number of planned job cuts in the French military from 34,000. A permanent 7,000-strong patrol dedicated to national security was established and surveillance legislation strengthened.
France has Europe's second-largest military after the U.K., with defense spending currently 1.8 percent of gross domestic product, down from 3 percent in 1990. That includes, in addition to the regular armed forces, France's Gendarmerie Nationale, one of the police system's two branches. Defense in France is not starved of resources.
It would be a shame if France used heightened security needs as an excuse to avoid reforms to labor markets, education and taxation that have held back France's economy. In the past two decades, France has enjoyed twin budget reprieves -- a steady drop in interest rates meant a reduction in debt servicing costs, and the post-Cold War "peace dividend" allowed for a draw-down in defense expenditure. That was a time for fiscal consolidation, for saving up for a rainy day. Instead, France's total debt has been rising steadily to its current ratio of 95 percent of GDP:
The money has gone primarily to popular social programs such as pensions and health care; indeed, social spending has increased by almost 4 percent of GDP since 1995. The current government has taken some tentative steps toward labor market reforms, including liberalizing some shop opening hours, simplifying dismissal procedures and pledging to give employers more flexibility. The government can be a lot bolder. If the EU's stability pact can serve as an excuse to further reduce the share of government in the economy and remove barriers to private sector job creation, that would be desirable. Instead, Hollande seems to be declaring a get-out-of-jail-free pass.
Those tempted to dismiss the extra spending as unimportant, or even stimulative, may underestimate the weight of the French state. Economist Paul Krugman recalled this week how large-scale deficit spending during World War II put an end to the recession in the U.S. (he concludes that France's defense spending spree will probably be too little to do the same). But a report in December 2012 for the French Institute for International Relations (IFRI), from which the above chart is taken, notes that while a drastic cut in military spending has a negative effect on GDP growth in France, growth in military spending is also correlated with reduced GDP growth. Author Martial Foucault, now a professor of political science in Paris, wrote:
"The challenge is to find a balance between an ambitious defense policy and diminishing resources -- a balance that is becoming increasingly precarious and less and less credible"
The study also notes that higher rates of GDP growth have tended to result in higher levels of military spending. A strong economy not only means more job creation -- and potentially the opportunity to reduce the youth unemployment that has been especially high among the groups most at risk for crime and radicalization -- but it also means more room to increase defense and security expenditure.
This suggests Hollande may be getting it backwards. Fiscal discipline helps security. France must have both.
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