France, Germany and the Politics of “Reform”

A showdown appears to be shaping up between France and Germany.  France’s new budget openly defies the “Stability and Growth” (sic) limits on fiscal deficits and debt as a percent of GDP, and German officials have been making public statements that the limits need to be adhered to.  On the face of it, if Germany wants, France could be found in breach by Brussels and assessed significant fines.  But this is about politics, not money: the threat is to the two-country alliance at the heart of the entire European project.

France is not the only violator, of course, only the largest and most essential.  If Greece, Spain and other severely distressed economies transgress they can be written off as exceptions; if France ignores the rules the rules are over.  Clearly a common currency cannot survive without macroeconomic coordination, so rules are needed, but Germany has thus far resisted any move to rewrite them.

Since the pivot to austerity, a compromise has governed EU politics: distressed economies are given more time to run deficits, but they are supposed to implement “reforms” that make their economies more competitive and permit them to grow their way out of the red.  As politics, it works, sort of.  It buys time and gives the creditor countries, mainly Germany, a sacrificial offering.  As economics it is pure illusion.

I am not referring to the fact that these reforms are more talked about than adopted.  Nor do I think that reforms of various sorts wouldn’t be beneficial.  France, for instance, is greatly overcentralized; too many decisions are made in Paris, which is stultifying both politically and economically.  My point is that the reforms deficit countries are supposed to adopt have almost nothing to do with why they run deficits or how they can escape them.

There are lots of ways to show this, but let’s take the simplest.  Germany and France are both in economic stall, although Germany is in better shape, with minimal public deficits and much lower unemployment.  So the solution is for France to reform its economy to be more like Germany, right?

Well, consider one such reform, opening up the professional labor market to competition.  There’s a story on this in today’s New York Times.  The French government has passed a law allowing pharmaceuticals to be sold in stores other than pharmacies.  Of course, the pharmacists have gone on strike, and there’s a photo of a group of them demonstrating against the plan.  This is exactly the sort of liberalization that the Germans are demanding, and the article cites Merkel as telling the French they need to make even “bolder changes” in how their economy operates.

But try to buy aspirin in Germany.

The German economy is one of the least liberal, most rule-bound on the planet.  You need all sorts of approval to start a business.  If a company wants to fire a worker it has to deal with the (mandatory) works council.  Entry into professions is tightly controlled, and professional associations wield immense power.  The majority of bank assets are held in public or cooperative banks, and credit is allocated on an openly political basis.  Actually, I like a lot of this and think the social dimension of the German economy should be developed, not shrunk.  But for now it is enough to see that the “failure” of Germany to “reform” has not prevented it from running big external surpluses, and that the economic map of Europe simply does not correspond to its various shades of liberalism.

The politics of “reform” is driven by symbolism and superstition, not economics.  Since the politics are asymmetric, you don’t have to look hard to see the hypocrisy.