Tuesday, 12 June 2012

Meanwhile, in the new Socialist Utopia…

Hollande Strikes Again

Mr. 'Growth instead of Austerity' Hollande strikes again – Mish has already written about the latest policy blunder to emerge from France last week, but we would like to add a few words.

Apparently the new French government believes that the proper method of combating the recent 13 year high in unemployment is to make it 'as expensive as possible for businesses to fire people'. Seriously. Evidently the economic illiteracy runs really deep at the highest echelons of France's political leadership – the idea was proposed by the minister of labor. How did Fred Sheehan put it? 'They think they can order nature around'.

Such measures will guarantee that institutionalized unemployment in France will increase even further – and as Mish correctly remarks, the mere threat of such legislation should lead to a wave of layoffs just before it comes into effect. Producers that can afford to move their production facilities to more business-friendly climes will do so at the earliest opportunity. The ranks of small business owners are likely to thin out further and fewer new businesses will be started. Many should probably begin to study the bankruptcy code, just in case.
We have already discussed France's 3,200 pages thick bizarre labor code in 'Vacations from Reality'. It is one of the most restrictive and complex pieces of labor legislation on the planet. The whole thing should actually be thrown into the next garbage can. Here is a reminder of some of the absurdities it contains:

Here’s a curious fact about the French economy: The country has 2.4 times as many companies with 49 employees as with 50. What difference does one employee make? Plenty, according to the French labor code. Once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.
[…] Companies say the biggest obstacle to hiring is the 102-year-old Code du Travail, a 3,200-page rule book that dictates everything from job classifications to the ability to fire workers. Many of these rules kick in after a company’s French payroll creeps beyond 49.
Tired of delays in getting orders filled, Pierrick Haan, CEO of Dupont Medical (not to be confused with chemical company DuPont (DD)), decided last year to return production of some wheelchairs and medical equipment to France. The 150-year-old company, based in Frouard in eastern France, created 20 jobs making custom devices at a French plant—and will stop there. Faced with France’s stifling labor code, Haan probably will send any additional production of standard equipment to what he calls “Near France”—Tunisia, Bulgaria, or Romania. “The cost of labor isn’t the main problem, it’s the rigidities,” Haan says. “If you make a mistake in your hiring plans, you can’t correct it.”

(emphasis added)
In addition to these latest grandiose ideas guaranteed to make unemployment worse, industry minister Montebourg (which sounds suspiciously like 'mountebank' -  probably not a coincidence) wants to legislate a prohibition against plant closures. Moreover, more funds are going to be spent on 'saving' government-financed jobs, i.e., a Keynesian ditch-digging exercise is about to be unleashed.
It is difficult to say how much of this is empty electioneering rhetoric given the nearness of parliamentary elections, but if that is what it is, then the French fully deserve what they are about to get. If voters let themselves be persuaded by such quackery they can only blame themselves. Of course one must always keep in mind that obviously not all voters are d'accord with this nonsense.

“France's new Socialist government is planning to ramp up the cost of laying off workers for companies in the coming months, its labour minister said on Thursday after data showed the jobless rate hit the highest level this century at 10 percent.
President Francois Hollande rode to power in a presidential runoff last month on a promise to tackle soaring unemployment, which has reached the highest level since 1999.
Polls regularly show unemployment ranking among the French's top concerns, adding pressure on Hollande as his Socialist Party seeks a majority in parliament in a two-round legislative election on June 10 and 17.
The push to make firing more difficult in France, where making layoffs is already tightly regulated and often costly for employers, contrasts with moves under way in other euro zone countries such as Italy and Spain to make job cuts easier.
With the economy stalling, Labour Minister Michel Sapin said urgent measures were needed against unemployment and that he aimed to put forward legislation after the summer break.
"The main idea is to make layoffs so expensive for companies that it's not worth it," Sapin said in an interview with France Info radio.
"It's not a question of sanctions, but workers have to have compensation at the right level," he said.
Sapin, a former finance minister and long-time friend of Hollande, said the government could not stand by idly as some companies cut workers just to improve profitability and boost their dividends to shareholders.
Industry Minister Arnaud Montebourg is also planning legislation that would force companies to sell plants they want to get rid of at market prices to avoid closures and job losses.
The government and unions are bracing for a wave of layoffs after the legislative election, fearing companies have put off job cuts until after the election period.
Sapin said in an interview with Les Echos business daily that the budget for state-aided jobs needed to be raised, or else 112,000 jobs on such contracts could be put at risk in the second half of the year.
"That would be extremely harmful at a time when all resources need to be mobilised against unemployment," he said, adding that the state-run jobs agency also needed more funds.
However, Hollande's government is facing growing pressure from the European Commission and ratings agencies to cut spending in order to meet public deficit targets as promised.
With the legislative election looming, the government is being careful not to spell out how it will keep its deficit-reduction plans on track until an independent audit of the public finances is handed in after the race.

(emphasis added)
Someone should perhaps ask them to spell out how precisely they do intend to hew to their deficit targets. To anyone still holding French government bonds we would recommend a moment of quiet introspection at this juncture.

France's 10 year government bond yield – rarely has there been a better time to sell. It's a pity there's no longer a French Franc to short. Not that we doubt Mr. Hollande's ability to wield the coercive apparatus of the State effectively to press more tax revenue from his  already overburdened citizenry – au contraire. But you know how it is with squeezing blood from turnips … – click chart for better resolution.

A 10 year chart of the CAC-40 stock index. Similar to many other European stock indices it largely reflects the collapse of bank stocks. We mainly wish to draw attention to the fact that it remains more than 50% below its highs. Some stocks like the telecommunication firms are actually enticingly cheap here, but who knows what else the new government will come up with? The currently very high dividend yields may not be safe - click chart for better resolution.

Compare the performance of France's stock market to that of Germany's:

For comparison purposes, here is a long term chart of Germany's DAX index. Germany it will be recalled is one of the few countries in Europe that has actually done something about reforming its formerly rigid labor laws - click chart for better resolution.

Mind, we're not suggesting that the better performance of the DAX index is solely due to labor market reform. However, there can be little doubt that it has greatly contributed to Germany's superior economic performance in recent years and the stock market undoubtedly reflects this to some extent. Germany should of course liberalize its economy much more than it has so far – the German polity remains smothered in a veritable jungle of regulations and onerous taxes. There is good reason to believe that the economic boom of the past few years owes much to the ECB's ultra-low interest rate policy and the growth of Germany's money supply. As one of the main destinations for deposit money fleeing from elsewhere in Europe, the German banking system is drowning in deposits these days. It should be noted though that it is surely no coincidence that it is Germany that is the main destination for such funds and not France.
A recent editorial in German news magazine 'Der Spiegel' has caught our attention in this context. It is worth quoting at length:

“France's newly elected Socialist government has just decided to lower the retirement age to 60. From now on, no Frenchman will be forced to work any longer just because it might help kick-start the country's flagging economy. And there's no way the French are going to work as long as their poor fellow Europeans in Germany, whose government is obliging them to labor and toil until age 67.
Blessed France, where the ruthless laws of the economy lose their ability to frighten people bathing in the eternal sunlight of socialism. Granted, this grand nation doesn't produce enough children to guarantee the prosperity of its inhabitants into old age. But in France, something that would elsewhere be viewed as a serious demographic problem demanding tough attention is seen as a mere misunderstanding that the strong arm of the president can simply dispel with the stoke of a pen, should he so desire.
OK, things aren't quite that easy, even for François Hollande, the freshly minted sun king of France's Fifth Republic, and his fellow brothers-in-arms. At least they understand enough to know that economic problems can't be solved by merely kicking them down the road. But, luckily enough, those in the Elysée Palace can also still rely on the willingness of the Germans to work hard. And it's there that we come full circle.
We've now reached a phase in the euro crisis when everyone is trying to feather their own nest at someone else's expense. Hollande is campaigning to have the European Union help the Spanish rehabilitate their banks without involving itself in their business dealings. But, in doing so, he's much less focused on Spain's well-being than on France's. Once the principle stating that countries can only receive financial assistance in return for allowing external oversight has been contravened, one is left with nothing more than a pretty piece of paper to insure against the vicissitudes of economic life. And, of course, the next banks that will then be able to (and presumably also will) get a fresh injection of cash straight from Brussels are the ones in Paris.
Sigmar Gabriel, the head of Germany's center-left Social Democratic Party (SPD), has already called Hollande a friend. But Franz Müntefering, the wise party elder, has just warned his party colleagues not to sing the French president's praises too loudly. The old fox knows when he's standing face to face with someone who only has his own interests in mind. Indeed, despite all his calls for European solidarity, most of Hollande's proposals are ones that others will have to pay for. Someone is obviously going to have to be responsible for all the social programs the French government is concocting. And why not the nation whose people are viewed as particularly hardworking and dependable by an overwhelming majority of the people surveyed in a recent poll?

(emphasis added)
The author's line of argument is definitely sound – the euro-group has become a vivid illustration of a 'tragedy of the commons' as Philipp Bagus has pointed out. We are now at the point where everybody expects Germany to simply pay for everything in Europe in its determination to keep the euro project alive. That will very likely turn out to be a miscalculation at some point. Yes, the Germans are probably prepared to go quite far, but there is a limit to their generosity and as we have pointed out last week, they have not shown a willingness to give in to the most egregious demands so far. Of course the 'special bailout' for Spain's banks this weekend is once again a big step backward in this regard – it will further reinforce the view that Germany can be easily blackmailed.

Addendum: French Socialists Win First Round of Parliamentary Election 

According to early morning media reports, the Socialists are highly likely to win an absolute majority  in the French parliamentary election:

„French President Francois Hollande was on track for a Socialist-led majority in parliament after a solid win in a first-round vote on Sunday that should free him from having to rely on hard leftists hostile to European integration.
Hollande's Socialist bloc looks likely to win the 289 seats needed for an outright majority in the 577-seat National Assembly in next Sunday's run-off, and almost certain to do so with its Greens Party allies, polling institutes said.
While conservatives said this was no "pink wave", winning power in the lower house for the first time in a decade would be a triumph for the left a year after it won control of the Senate and weeks after recapturing the presidency after 17 years.
Socialist Prime Minister Jean-Marc Ayrault warned against over-confidence, telling voters: "This is just the first round. Everything hinges on next Sunday. Change is beginning." Hollande, who won the presidency five weeks ago due to a rejection of conservative Nicolas Sarkozy and his failure to curb 10 percent unemployment, asked for a coherent majority as he steers France through the resurgent euro zone debt crisis.
The government of Europe's second-biggest economy is preparing budget adjustments, including possible spending cuts to take account of sickly growth, as well as taxes on the wealthy in a broad reform in the weeks ahead. In the longer term he is under pressure from Berlin to give European Union institutions more control over national budgets and move towards a fiscal union – measures that Communists and other radical leftists would oppose in parliament.“

(emphasis added)
We have seen images of jubilant voters on TV – misguided as they are – thronging the streets of Paris. However, the point we have recently made about  people in Western democracies being increasingly fed up with the political establishment was once again confirmed – voter turnout was reportedly at a record low. Hollande's chief tax-and-spender Pierre Moscovici looks to win his seat, a condition for remaining in the cabinet. One Cambodian immigrant has Hollande and co.'s number:

“Finance minister Pierre Moscovici, who like Hollande is staunchly pro-European, was on track to win a runoff in a three-way contest, a relief for Hollande who has said that ministers who lose their parliamentary races must resign from government.
Moscovici will be one of the architects of the tax reform Hollande plans by the autumn to implement his tax-and-spend programme aiming to revive growth without imposing austerity.
Some voters remain sceptical of Hollande's programme. "There are already so many taxes in France. It's hard enough to run your own business as it is and with the Socialists there will just be more taxes," Cambodian-born Sor Chin- Run said as he voted for a conservative candidate in the eastern Doubs region.”

(emphasis added)
No wonder London is already France's sixth-biggest city. It is noteworthy that of the 300,000 to 400,000 Frenchmen estimated to live in London most are found in “London's cutting-edge creative hub, in the East End”. This is a strong hint that France is losing precisely the people who could make a difference to its floundering economy. Even more socialism will only worsen this brain-drain. What was it that Mencken said?

“Democracy is the theory that the common people know what they want, and deserve to get it good and hard.”

Quod erat demonstrandum.

Charts by: BigCharts.com

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