In case you hadn’t noticed, a right royal (no, not royale) row has been going on in recent weeks – a battle of the Titan-Presidents you might almost say – with the key protagonists being European Central Bank President Jean-Claude Trichet in the red corner and French President Nicolas Sarkozy in the blue one. There are many issues which separate the two of them at the present moment – ECB independence from political interference, the conduct of monetary policy for the eurozone, and the future of the Stability and Growth Pact among others. On the first of these I am with Trichet, we do not need more political meddling in the conduct of ECB affairs. On the second I am nearer to Sarkozy – although possibly for other reasons, as I try to explain in this post and comments. Here I will restrict myself to the third issue – the SGP – and try to explain in very simple terms why I have a certain sympathy for what Sarkozy is attempting to argue.
Matthew Lynn explains some of the details which lie behind the recent controversy in this Bloomberg article, where he also argues that they should bury the hatchet. Even if I agree that these two economic actors should not be seen to be quarreling so forcefully in public – and certainly not at this delicate moment in time – I am not of the opinion that Sarkozy should back off on the French deficit issues, and here, quite simply is why.
First, a little bit of background. According to wikipedia
The SGP is based on Articles 99 and 104 of the European Community Treaty (with the amendments adopted in 1993 in Maastricht), and related decisions. It consists of fiscal monitoring, and sanctions against offending members.
The pact was adopted in 1997, so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro have to meet the Maastricht convergence criteria, and the SGP ensures that they continue to observe them.
The actual criteria that member states must currently respect are:
* an annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc)
* a national debt lower than 60% of GDP or approaching that value.
Now one point that Wikipedia does overlook here is the background debate which underlay the original decisions back in 1993. The reasoning which lay behind the formula – if you go back and look – was primarily a demographic one. In the face of ageing populations, deficits in most of the EMU member states were projected to rise sharply – and pressure on public finance in general as a consequence – as the proportion of the elderly dependent population rose and rose. In particular the sharpest moment for such pressure was thought to be looming in the years 2010 – 2015.
Now, and before we go any further, I would like to emphasize that I am on record on this blog, and in many posts over a long period of time (and especially in the present context in connection with the PÃ©bereau Report), as saying that France badly needs to reform the structure of its health and pension systems. That is not at issue. What is at issue here is timing, and whether the French administration should at one and the same time make short term deficit reductions and large structural changes. I think Sarkozy is right here, and not only is he right, it is in the interest of all the eurozone economies that France be cut some slack in this context as we enter the next downturn.
So what I am saying is that I have no doubt that France has a large debt burden – something like 64 per cent of GDP ay the present time, and this years the public sector deficit is expected to be almost â‚¬42, or some 2.3 per cent of GDP (assuming a2007 GDP growth rate, which may of course, at this point in time, be in doubt). The issue is, does France need to achieve a zero percent annual deficit by 2010 with the same urgency that Germany does. My answer is a resounding No!
The reasoning which lies behind this rather categorical assertion on my part is that, basically, France and Germany are in very different positions in terms of their comparative demographics. So let’s take a look, and see whether my assertion is well grounded or not. Firstly median population ages. Here is a chart for France:
What needs to be noted here, is that France is still a comparatively young country, it is still under 40 in fact, and the French median age is rising comparatively slowly over the years. Now let’s look at Germany:
What we can see here is that Germany is much older, it is now knocking around the 43 mark, and the median age is rising much more quickly, especially during the last few years. Simply put this means that the weight of the old age dependency issue is hitting Germany much more quickly than it is France. France has at least 20 years to go before it gets to where Germany is now. Also, as a point of comparison, let’s take a quick look at the evolution of US median age:
Now there are lots of interesting things which we could note here about the evolution of the US median age, but for present purposes what I would like to emphasise is that France is much more like the US than it is like Germany in terms of its age structure. This does not, of course, mean that neither France nor the US have to reform, it simply means that they have more time and more margin to do this, and we here in Europe should leverage France’s demographic advantage to our mutual benefit.
So why is France so much younger than Germany? Well there are a number of reasons for this, but the most obvious one can be seen in the following chart: French fertility has been consistently much higher than German fertility.
(the red bars are the French ones, and the greens the German ones)
So – to keep this fairly brief and to the point – I don’t see why France should be penalised in this way for its “good housekeeping” on the fertility front. Indeed, au contraire, I think they should be congratulated and rewarded for the balance they have achieved. As I say, it isn’t as if Sarkozy was arguing that he isn’t going to address the issues PÃ©bereau raised, he is simply saying that he wants to do all this in an orderly fashion, and that while in Germany the issue is an extremely pressing one (and hence that 2010 deadline), France is not so pressed, and has just a little more leeway.
Finally I would like to thank Claus Vistesen of Alpha Sources, who made the calculations which lie behind the charts.