Wednesday, September 17, 2008

Sarkozy’s Alternative Economic Strategy Follows the U.S. Down the Rabbit Hole

Sources: Financial Times- Sarkozy’s Economic Reform Has Come Unstuck ; Financial Times- Sarkozy Has To Take a More Subtle Approach; The New York Times- Sarkozy, Ever Blunt, Confounds Both Friend and Foe

Contrary to traditional U.S. economic theory, France has been a huge proponent of prioritizing economic reform over fiscal prudence in recent years. French President Nicolas Sarkozy, especially, has developed the supply side of the economy rather than focusing on balancing the budget. While he planned with EU finance ministers to have a balanced budget by 2010, he recently pushed the date back to 2012. Experts say even this date is unrealistic and predict an actual date of 2014. At $59 billion, the French deficit is estimated to approach 3% of the GDP by the year’s end, making France the biggest spender in the European Union. Such a number is noncompliant with joint EU economic policy, and could lead to France’s dissipated political influence in the region.

Sarkozy’s adopted theory maintains that deficit reduction and budget- cutting inevitably create bitter public interest groups and private investors when funding or proceeds are diminished. Dissatisfied investors lead to less investment and market insecurity, which spirals into the general stifling of economic growth. By temporarily working on the supply-side of the economy, interest groups do not stand to lose, investor confidence and business are not diminished, and as the country’s economy rights itself and makes a surplus, the deficit lessens. Thus, the temporary increase in deficit is worth the public’s confidence and support leading into initial stages of economic reform. This strategy recently proved effective for Sarkozy in the labor market to convince co-opt trade unions and employers to work longer hours.

However, while such a policy has worked for France leading up to the economic crisis, it has been criticized as irrevocably flawed in light of the recent downturn of events. Without the capacity to maneuver the spending and debt of the country, financial crisis is less containable. Meanwhile, other European countries that have prioritized a balanced budget, such as Spain and Germany, have deficit “wiggle room” in times of financial crisis.

Sarkozy is now faced with the choice to amend his fiscal policy, or follow the U.S. economy further down the rabbit hole.

1. In times of financial crisis, do you believe it is ethically wrong for world leaders to purposefully and knowingly increase their countries’ deficits?
2. Are you more inclined to give a break to countries who have maintained fiscally responsible policies in recent years, and who may have planned more prudently for an economic downturn?
3. In the age of globalization, is economic policy a state issue or should other EU countries exert pressure on France to change its policy?

No comments: