France: Is public spending the answer?

A consensus has apparently emerged in France that the answer to the country’s structural problems is more public spending (education, healthcare, industry, energy transition, justice, research, support for purchasing power in the face of rising commodity prices, defence, etc.). But it is important to understand that the economic environment is now going to be different, with scarcities and inflationary pressures and therefore a permanently more restrictive ECB monetary policy, higher interest rates and an end to the central bank’s bond purchases. In this different economic environment, fiscal constraints will return and the main problem for economic policy will be how to loosen these constraints to regain some fiscal space and not have to renege on all the public spending that has been announced. It is well known that the employment rate is then key: if reforms of the education system, the vocational training system and the upskilling of jobseekers succeed in raising France’s employment rate closer to the level observed in Germany, Northern Europe and the United Kingdom, then an increase in potential production will provide the desired fiscal space. But if the employment rate remains abnormally low, the need to reduce fiscal deficits will stymie all the fiscal policy announcements that have been made. Public spending alone cannot be the answer. If more public spending is indeed needed, it must lead to a sharp rise in the employment rate. This must be a prerequisite for public spending decisions .