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Macron's 'eurobonds' scheme rewards bad decisions

Calls for increased European economic integration and coordination feature prominently in the political manifesto of newly elected French President Emmanuel Macron, but none is more controversial than his notion that the European Union should introduce "eurobonds." The scheme would result in nations with a good credit rating paying more than the market rate to take out a loan, while nations with a poor credit rating would pay less. Chancellor Angela Merkel led a number of German politicians in firmly opposing the idea, which voters believe would force frugal Germans to pay for the unrestrained deficit spending of nations like Greece. 

For now, nothing much is likely to come of it. But why would a reasonably well-run country such as France wish to be more deeply involved in, and liable for what goes on in the eurozone as a whole? Masochism? Self-serving policies by the politicians? The Greek government has been teetering on the verge of bankruptcy for almost a decade. Government bankruptcy is actually something of a habit of modern Greece; it had them in 1827, 1843, 1860, 1893, and 1932, and without foreign involvement, it would have had another one in 2008. Italy, Spain, and Portugal have only been doing marginally better.

To understand the French attitude, we must go back in time. As Tocqueville discusses, France was used to being centrally run from Paris by a bureaucracy, under an absolute monarch, for centuries before the Revolution of 1789. After the Revolution, the resulting tradition of dirigisme has continued.

French politicians and leading bureaucrats are among the best educated administrators in the world; a common path has been first a degree from Sciences Po, the Paris Institute of Political Science, followed by a second degree from the even more elite École Normale d’Administration (ENA), out of which only 80 or 90 students graduate each year.

In comparison with their French counterparts, Americans are rank amateurs in the area of public administration. And this is where it all goes so terribly wrong, where the models that French politicians and bureaucrats have of the world clash so violently with how the world actually functions.

A free society, a constituent part of which is a market economy, is for all intents and purposes a complex adaptive system where millions of people buy, sell, give, collaborate, compete, create, and invent. Contrary to what the French – and many other politicians the world over – believe, you cannot direct or administer a prosperous economy; you can try to administer parts of it, and thereby only negatively affect parts of it. Varying degrees of, and proficiency in, administration can produce anything from a vibrant laissez-faire society like Hong Kong at one end of the spectrum, to nations like Venezuela, Zimbabwe, and North Korea at the other.

The free market would have discouraged bad behaviour, using lending as an incentive for prudent economic reform.

The French feel that they have been suffering from “la crise,” the crisis, ever since the first OPEC price hike of 1973. The received version of history is that “Les Trente Glorieuses” – the Thirty Glorious years after 1945 – with rapid growth, supposedly stimulated by the need to rebuild after the war, were brutally cut short around 1973 to 1975. According to this view, ever since the mid-Seventies, austerity measures have been in place, causing high unemployment. Since 1980, unemployment as a whole has oscillated around nine percent; youth unemployment around 18 percent. The real situation is actually worse, since the labour participation rate is low: only 56 percent in 2010, compared to 62 percent in Britain, and 64 percent in both Sweden and the U.S.

Thus, reason the French, austerity must go. This explains widespread support for the fundamentally socialist policies of Marine Le Pen, Luc Mélanchon, and Benoît Hamon who received a combined 47.3 percent of the vote in the first round of the 2017 presidential election. Similarly, this is the reason why the somewhat less socialist Macron (24.1 percent in the first round) wants more European economic collaboration. In other words, he wants to force the Germans to participate in the easing of the monetary policy. It is true that Macron also wants to make timid reforms to labour legislation and spend more on education. However, it is exceedingly unlikely that anything positive will come of his jobs proposals. More than 80 schemes to directly promote employment were introduced between the end of the 1970s and 2002, and they have continued at the same rapid frequency since. All of them were failures.

The real explanation for the unemployment crisis is very different. In 1966, it became obligatory that the “commité d’entreprise,” the workers’ company committee, be consulted before firing redundant employees. The minimum wage was flat between 1960 and 1968. It had been increased by 50 percent (in real terms) by 1972; it had been doubled by 1976 and tripled by 1998. In 1971, the law recognised the right to collective bargaining of the unions. In 1973, employers became obliged to be able to prove in front of a judge that any redundancy had a “real cause.” What a “real cause” consists of is detailed by the precedents of the Cour de cassation, the highest court in these matters. The rules are strict and make dubious economic sense. Also, in case of appeals, it may take several years before a final verdict is rendered. It costs about one year’s salary to formally label someone with a long-term contract redundant.

Convincing the French political class, and the average French voter, how a market economy actually functions is virtually a lost cause. The only reason why France and southern Europe remains reasonably prosperous is that they are restrained from going overboard by competition. From a free-market perspective, the problem with the euro is not really that it is a single currency for a continent with wildly varying economic and social conditions. The problem is that it provides too many control knobs to tweak. The European Central Bank also sets lending rates; it manipulates the money supply in attempts to “stimulate” the economy; and it issues emergency loans to countries that have mismanaged their economies.

Under the gold standard, Europe also had a single currency, but it offered virtually nothing to adjust. Interest rates were set as market forces dictated (in a vein similar to the Efficient Market Hypothesis, warts and all). With such a system, if the German government can borrow at two percent, France would probably need to pay 2.5 to three percent, and the bloated Greek government perhaps seven percent – a rate that, hopefully, would prevent it from borrowing much at all. At the same time, a well-run private Greek company might be able to borrow at a much lower rate than its government.

The same effect would be achieved with competing currencies, such as Free Banking, or Hayek’s idea of “The Denationalisation of Money,” both of which would make government monetary policy impossible.

If the euro had no controls that bankers and politicians could adjust, the Greek government, but only the government, would promptly have gone bankrupt in 2008. That would have induced the country to make a meaningful reduction in its obligations, size, and scope, and possibly trigger a sale of much of some state assets, thereby dramatically reducing the possibility of this government doing similar harm in the future, and serving as a vivid lesson to others. Throughout, the citizens of Greece would still continue using the euro and be otherwise unaffected. The Greek government and its lenders would quickly have learned some hard lessons. Instead, the situation is still not resolved after almost a decade.

Unlike Macron’s plan, the free market would have discouraged bad behaviour, using lending as an incentive for prudent economic reform. Having the EU bail out Greece, again, has the opposite economic, and moral, effect.


Erik Lidström is the author of the 2015 book Education Unchained: What it takes to restore schools and learning," recommended by Choice magazine. Erik holds an M.Sc. and a Ph.D. in physics from Uppsala University as well as an MBA from the Open University. After research at the ESRF in Grenoble, he moved to the software industry in 2000. He has worked in Britain, France, Sweden, and Morocco, lately with an interest primarily in complex development processes and organizational issues.