The French growth still in the same stalemate

Since I teach economics to my students, I hear in every media that consumption will boost growth and that salaries must thus be sustained or saving reduced to support consumption.

More than 10 years ago now, I warned in Les Echos (Paris) that this would drive us in a dead end. Indeed, in a situation of under-capitalization, which is probably the situation of the French economy, the reductions of savings mays on term reduce consumption [1].

More than 10 years later, the debate has not advanced.

The teachings of the growth theory and the historical experience show that the State must absolutely control its public finances (stable public deficit, stable public debt) if the government wants to rediscover the path of sustainable growth.

Indeed, if public debt explodes, the State will divert a growing part of households’ savings toward debt financing. These savings will no longer finance private investment of productive sector (eviction effect), which is going to slow the economic growth that fundamentally depends on the accumulation of capital.

In consequence, the economy goes out of its structural path of growth; as a plane losing speed loses its cruise altitude… On term, it’s the crash.

 However, there’s need to realize that nowadays, in France, the payment of debt itself (debt service) occupies the second position of the State budget.

It’s true that the French household savings rate is important, private savings constituting a reaction to the public dissaving (deficit). But a large part of this savings is designated to finance the State debt, though life insurances. In this context, State has no interest to reduce savings on the pretext to reboot consumption in the short term.

However it’s as much savings which is lacking to the productive investment of the private sector thus, on the long term growth. But if business investment declines, then growth will slow and public debt will increase.

In effect, it must be reminded that Maastricht criteria stipulate that for public debt to be stabilized to 60% of the GDP public sector mustn’t be over 3% of the GDP and economic growth must be superior to 2%. It’s a fatal dead end: Debt explodes, State needs more savings to finance its debt and companies can’t find capital to invest anymore. In consequence, growth slows   down and picks…

Despite the political vibrations, it’s the blindness of our political class; prisoner of the blinders of the short term, leading under the fallacious pretext to defend the missions of the State, public finance to derive that has led us to this dead end.

Balanced public finance doesn’t mean that State spends absolutely no more.  But that simply means that these expenses are covered by equivalent revenue. And only a productive and growing economy is likely to generate abundant public revenue with no need to constantly increase the sampling rate which is the surest way to kill the growth in the bud. This is why the comeback of growth is vital for our country.  But the return to growth is something that can’t be decreed and growth isn’t a miracle or a random weather event. It supposes the respect of essential conditions that economic literature extensively recalled since Adam Smith.

[1] “The growth is not a miracle or a fatality “, Les Echos, October, 16^th 2001, Paris.