French economist: ‘German trade surplus responsible for eurozone inequity’

Jerome Creel: "We cannot rule out a major shake-up and the announcement of reforms that will gather momentum at the end of the year, after the Dutch, French and German elections." [Sciences Po/YouTube]

The economic imbalances of the eurozone are undermining citizens’ confidence in the European project. Cutting Germany’s trade surplus could help redress the balance, Jérôme Creel said in an interview with EURACTIV France.

Jérôme Creel is an economist, professor and director of the studies department at the French Economic Observatory (OFCE). Creel coordinated the publication of OFCE’s paper European Economy 2017.

France is expecting GDP to grow by 1.7% in 2017: is this the return of economic growth?

Economic activity is expected to take off, which seems to be reflected in the statistics. Inflation bounced back at the end of 2016, which is a harbinger of progress. Of all the economic policies that have been followed, monetary policy has undoubtedly brought the biggest positive impact, which we are beginning to see today: the ECB’s share buy-back scheme that started 18 months ago.

The tentative return of economic growth does not seem to have had a very positive impact on unemployment in France…

The effect of growth on employment is less dramatic that it used to be. The labour market is very static. More people who had lost their jobs are now re-entering work, and some previously insecure workers are now moving from part-time to full-time contracts.

Within the EU the situation is highly varied: some countries have full employment, others have strong growth…

EU countries did not all have the same tools to confront the financial crisis. Germany had made wide-ranging, costly reforms before the crisis and found financial stability before 2008. So on the other side of the Rhine, unemployment even fell during the crisis, while the opposite was going on in France and the countries of southern Europe, which were severely impacted by German competition on labour costs. All this at the same time as suffering depressed exports due to a strong euro, propped up by Germany’s trade surplus.

Italy felt the full force of competition from other countries, like the emerging economies, which did not have this monetary handicap. Germany’s uncooperative policy is largely responsible for the current disparities.

You say that Germany was uncooperative, but there were no rules in place to oblige it to cooperate in terms of fiscal policy.

In the treaties nothing is imposed on the states. With the European Semester, we are beginning to see some level of exchange between states on economic policy but still no fiscal coordination. But all the Commission can do is provide recommendations on draft budgets, which are more or less followed.

That said, the other European countries could have negotiated with Germany or started their own policies of fiscal devaluation. The German advantage would have been smaller but so would the inequalities between countries.

Since January, the gap in interest rates between Germany and France has been rising. How do you explain this?

The temporary rise in the interest rate on the French debt is related to political risk. Basically, there is no slippage of the French public finances, so the country’s creditors have no reason to doubt the debt’s sustainability.

On the other hand, some are clearly asking questions about the willingness of the next government to respect France’s European commitments. But any risk to the French debt is infinitesimally small. Rates are staying low, at 1.5%. If there was a real risk of default, the rate would go up.

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What kind of impact could the presidential election have on economic growth?

For now it is impossible to anticipate. The next government will certainly have an effect on the French economy. There is a lot of state interventionism in Jean-Luc Mélenchon and Marine Le Pen’s plans. And in Benoît Hamon’s too. Emmanuel Macron and François Fillon take a more neutral and disciplined view.

These diametrically opposed positions would, of course, have the opposite impact. But it all depends on the programmes being applied effectively, which is rare, as we have seen with François Hollande…

What do you think of François Hollande’s economic policy?

He promised to renegotiate the budgetary treaty, but nothing of the sort ever happened! Commissioner Pierre Moscovici may have managed to modify the Stability and Growth Pact by highlighting the exorbitant cost of austerity, but that only happened at the end of Hollande’s mandate. And the treaty itself is far from renegotiated. What is more, the CICE (competitiveness and employment tax credit), an enormous gift to businesses financed in part by hikes in other taxes, including on income tax, was never part of the Socialist Party’s campaign.

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Is the Juncker Plan really a success when it comes to relaunching investment in France?

If such a small amount of money can have such a big impact on investment, it is a shame not to add to the stimulus. In the Juncker Plan, only €21 billion of public funds were put on the table. But if the leverage effect is really 15 times, as the Commission says, we could do much more. €315bn for 28 member states is a drop in the ocean. In the United States, the Trump administration is talking of a €1tr investment plan…

What impact will Brexit have on the economic situation?

Brexit has still not officially begun. Until Article 50 is triggered, there is no such thing as Brexit. So its consequences will be seen in the future. The pound has fallen slightly, of course, but for the moment this is having a positive impact on British exports. But once the negotiations begin, and if a hard Brexit looks likely, then we should be concerned about EU exports to the United Kingdom. Can the EU afford to give up its trade surplus with the UK in principled opposition to the British inflexibility on the free movement of people and access to the single market?

What can we expect at the European summit celebrating the 60th anniversary of the Treaty of Rome?

The most probable answer is, unfortunately, not very much. But we cannot rule out a major shake-up and the announcement of reforms that will gather momentum at the end of the year, after the Dutch, French and German elections.

For the economy I think it would be a welcome step for the heads of state to listen to the population and announce an EU initiative on the budgetary rules, introducing greater flexibility and rules to prevent macroeconomic imbalances (trade imbalance, spiralling house prices, salaries or bank loans).

The German trade surplus, for example, is above the authorised limit (6% of GDP) and is holding other economies down. The Commission should be able to identify a tool with which to coerce Berlin into cutting its surplus to below the limit. Such tools do exist, but this would be to get into technical issues. The new rules mentioned in the Council conclusions merit discussion. That would give a clear signal of the willingness of EU member states to work towards greater equity within the Union, which would also help counter Euroscepticism.