The Pébereau Report

According to the French writer Rabelais debt and deceipt are almost invariably inextricably linked. So it is appropriate that it should be a French banker – Michel Pébereau – who takes it upon himself to try to bring this harsh reality home to a French public which still seems excessively steeped in the finer details of the arts of self-deception. Pébereau does not mince words: over a quarter of a century century French public policy has accumulated for itself a national debt has neither supported economic growth nor reduced unemployment. The debt is “asphyxiating” and unless the State acts to reduce its spending now France will “lose control of the financial situation” before the end of the decade. Indeed so stark is the picture Pébereau paints that French economy minister Thierry Breton, on reading the report, was moved to comment: “Unbeknownst to them, our children are already financing part of our standard of living.”

The details of the report are however just as intriguing as the headline-grabbing quotes. According to Morgan Stanley’s Eric Chaney:

1. Including pension and other liabilities, the general government debt is worth between 90% and 96% of GDP and its dynamic is not sustainable: it is currently increasing significantly faster than GDP.

2. Raising taxes to reduce the deficit and curb the debt is not an option because it would harm economic growth.

3. Freezing central government nominal spending would deliver a balanced budget within five years.

In fact France’s current debt is expected to reach 1.17 trillion euros by the end of the year, about 66% of France’s national output. However the report also warns that France has “off-balance sheet” public pension liabilities of anything up to an additional one trillion euros – and it is this that takes the estimates of the state’s total liabilities to somewhere in the region of 100% of GDP. These liabilities are unfunded, and exist because in 2010 expenditure will exceed income in the pension system. It is this realisation perhaps more than anything else which produced Breton’s wry comment.

Even more alarming has been the rate of growth of the French public debt, which – excluding pension liabilities – rose from 35% to 66% of GDP between 1990 and 2005, or at a rate which has been almost two percentage points above the gross wealth created every year in France. And this has been during the ‘good times’ demographically speaking.

Eric Chaney continues:

The question is not whether reforms are necessary but what kind of reforms. In this regard, I believe that the shock therapy option is neither politically feasible not effective, at least in a fixed exchange rate regime. In theory, if tax payers anticipate that rebalancing government books should prevent tax rates to rise in the future, they should react to higher government savings by drawing on their own savings — behavior often named Ricardian equivalence. However, as I have shown in a previous note, a full Ricardian equivalence is unlikely in large and relatively closed economies (see The Arithmetic and Politics of Fiscal Policies, Eric Chaney, September 3, 2002). This option was nevertheless chosen by the German coalition, for 2007, which is leading us to anticipate a sharp slowdown in GDP growth that year. Instead, the Pébereau report is calling for a gradual treatment which would bring the government books back to balance in five years.”

Here two things are worthy of note. Firstly, the recommended course of action will balance the books (not start to reduce the debt) in five years time. Secondly, Germany has gone for much stronger medicine.

Whatever the final course of action adopted in France one distinct possibility lies out there in the near future – that 2007 will be the year in which three of the big four European economies (France, Germany and Italy) all start to introduce major fiscal tightening simultaneously. The impact of this on Eurozone growth is not in doubt – it will be severely negative – the only real doubt is just how severe is severe. So while the point has often been made that the cost of not maintaining the Stability and Growth Pact may be extracted by the financial markets, I think we might also now begin to contemplate another possibility: that the cost of not adhering to the pact will be several years of extremely, and I do mean extremely, lacklustre growth.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

9 thoughts on “The Pébereau Report

  1. In this context, it is hardly surprising that Chirac and the French are resisting cuts in the CAP as that would likely generate irresistible domestic pressures to increase public spending on income support for French farmers.

    However, judging by a selection of recent news reports in the British press, there isn’t much reason for us to feel overly smug. Of course, Blair claims the modernisation agenda but a little probing and sifting reveals massive waste in public spending by the Blair government:

    “Long-term youth unemployment has returned to about the level it was when the government’s flagship New Deal was introduced in 1998, casting doubt over the value of the £5bn benefits-to-jobs programme.”

    Only £5 billion.

    “Truancy rates in England’s secondary schools rose by over 10% last year, according to government figures. Despite £900m spent on anti-truancy initiatives, the annual figures show the highest truancy rates since 1994.”

    Only £900 million.

    “The government’s flagship Sure Start programme is setting back the behaviour and development of young children in the most alienated households, according to the first big national evaluation of the scheme. Though the £3bn programme is benefiting some poor families, the government commissioned study published yesterday concluded that children of teenage mothers and unemployed or lone parents did worse in Sure Start areas than those in similarly deprived communities elsewhere.”,11032,1654721,00.html

    Only £3 billion.

    “The government’s tax credit system lost at least £460m two years ago because of mistakes, or fraud by claimants. The estimate is contained in an audit of the Revenue & Customs’ accounts by the National Audit Office.”

    Only £450 million.

    “The Public Accounts Committee (PAC) has denounced the government’s new tax credit system as a ‘nightmare’. In their second report so far the MPs say tax credits have been routinely overpaid to 1.8 million claimants. The committee also claims that the system may be fatally undermined by its complexity.”

    “Billions of pounds are being wasted by government departments which have failed to learn the lessons of the past, a Commons committee has warned.

    “‘Basic errors are repeated time and again,’ the Public Accounts Committee said, adding public services were marred by complexity and bureaucracy.”

    A billion here and another billion there and pretty soon we are talking serious money.

  2. The debt is 3/4 % of GDP; in the 90’s it was 6% and nobody cares.
    USA, Italy,Germany have the same debt or more.
    Debt is not the main problem in France.
    In fact the real reason the elite of France are trying to scare people it’s because they want make people accept the free market options of Nicolas Sarkozy.

  3. “Are you saying the last four years of growth have NOT been extremely lacklustre?”

    I’m being a pedant. The last four years – eurozone – have been lacklustre, and not “extremely lacklustre”. I’m trying to hedge my bets. My guess is 2007 will be a bad year, bad in comparison with what we’ve gotten used to, but until we can see things a bit more clearly I wouldn’t want to stick my neck out and say how bad.

    Part of the problem is I really don’t accept the expression eurozone growth: I think there is a French economy, a Germany economy, an Italian economy etc etc. They all have different characteristics and move at different speeds. France up to now has – I would argue for demographic reasons – done relatively better, averaging around 2% (not that different on trend from the UK), while Germany and Italy have been having a hard time sustaining 1% growth, and this for a decade or so now.

    But the big issue will come if the three try to balance their books all at once. We could see a collective recession, and a recession of course – by definition – implies negative growth. So the question is really: how deep and how long?

  4. “The debt is 3/4 % of GDP;”

    I think Jean-Luc you are knod of illustrating the problem. Self-denial. By 3/4 I take it you mean the 66% (2/3 of GDP). So the first point is to insist *not* to count-in the pension liabilities. This is the first denial.

    “USA, Italy,Germany have the same debt or more.”

    Wrong again. The USA doesn’t. In the USA there is private debt, but don’t confuse the two. The USA has an annual deficit, but not the accumulated debt. But then people aren’t saying that the US shouldn’t correct its deficit.

    Germany and Italy do have government debt problems. Germany has reformed and is making serious efforts, Italy may well go bankrupt, would you like that to happen to France? Second denial.

    “In fact the real reason the elite of France are trying to scare people”…. Conspiracy theory, third denial. This is real, not a scare story. Of course each and every one of us is entitled to ignore it at their own risk.

    Now what was I saying about Francois Rabelais and debt and deceit……

  5. I am reminded of Macur Olson’s seminal insights in: The Rise and Decline of Nations (1982):

    Quote: “Once free of totalitarian government or foreign occupation, and with ensuing stability, distributional coalitions should grow relatively quickly (e.g. post-WWII Japan and West Germany); Olson’s theory predicts continued stability will lead to increasing distributional coalitions but with an adverse effect on growth rates.”

    “There cannot be much doubt that totalitarianism, instability, and war reduced special-interest orgs. in Germany, Japan, and France, and that stability and the absence of invasion allowed continued development of such orgs. in the United Kingdom.”

    But Olson’s account leaves out the downstream political consequences of Mrs Thatcher’s governments leading to curbing the power of the trade unions and reaffirming the effectiveness of market systems over etatist regimes.

  6. “Conspiracy theory, third denial.”
    Since few months the medias (L’express, Le point, even Le Monde) and a part of the right is trying to scare people, because they prepare them either for more taxes, or they want to slash some expenses.

    ” Italy may well go bankrupt”
    A country can’t go bankrupt, bankrupty is not a economical notion, it about law or justice.

    A reaffirm that debt is not the main problem in France.

  7. Edward,
    It is ridiculous to say that America doesn’t have an accumulated debt. It actually stands at about 65% of GDP, something like $8 trillion.
    A quick google search will show this.

    Perhaps it is slightly different because the figure includes the SS Trust Fund. But are you suggesting that any government will be able to default on that debt?

  8. @ Wolf “It is ridiculous to say that America doesn’t have an accumulated debt.”

    I didn’t exactly say that. I said it didn’t have the same debt situation as France does. I was replying to a comparison. I agree that this was badly phrased. You are right the US has an accumulated debt of about 63% of GDP. My point would be the following:

    a) It doesn’t do anything for the French problem to point to the US one.

    b) The US debt has a very different dynamic, having been given an important boost by the Bush era. But you try making the same suggestion about Mitterand and Chirac ones and see what you get. I am simply against double standards.

    c) The US deficit is already subject of an enormous debate, and there is a consensus that the US should reduce its deficit and eventually its debt.

    d) The US has already carried out pension reform which France hasn’t. Retirement age is set to rise to 67.

    e) There is also a consensus that more social security reform is needed in the US. There is a political (and legitimate) debate about what form this should take.

    This is the difference between the US case and the French one. My point is that the really preoccupying thing in the US isn’t the level of the Federal deficit, but the absence of private saving and the growing level of personal indebtedness. Again, I didn’t put this very well.

    @ JLS

    Since few months the medias (L’express, Le point, even Le Monde) and a part of the right is trying to scare people, because they prepare them either for more taxes, or they want to slash some expenses.”

    I’m sure this is happening, but it is your interpretation of why it is happening I am questioning. I am sure you are going to get both an increase in taxes and a reduction in spending, but this isn’t because anyone wants to scare anyone, it is simply because you have now no alternative. I don’t think it matters who is elected in 2007, the outcome will be the same.

    “A country can’t go bankrupt, bankrupty is not a economical notion, it about law or justice”.

    Sorry, what I meant was that the Italian government may declare itself bankrupt (ie declare itself in default on its debt). I more or less see this as inevitable.

    This is not of course the French case as your government will act to correct the problem. I am not comparing France to Italy. I am saying you have not been anything like as responsible about this problem as Germany has.

    “I reaffirm that debt is not the main problem in France”

    I don’t know, and wouldn’t venture to say what “the main problem in France is”. I just stick to the view that your pension system is not sustainable in its present form, and you need to get the deficit under control as a priority.

    @ Wolf again:

    “But are you suggesting that any government will be able to default on that debt?”

    Logically, this is what I am saying. Italy will default on its debt. Actually, by reducing future pension payments almost all governments are defaulting on payments which have already been made into the PAYGO unfunded systems.

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