France: The four lines that short-term economic stimulus cannot cross

If one examines how the French economy could be stimulate d in the short term by boosting demand, there are four lines that must not be crossed: Cost competitiveness must not be worsened, as production costs are already too high relative to product sophistication in France; Low-skilled labour costs must not be increased, given the sensitivity of low-skilled labour to its cost; The fiscal deficit must not rise to a level where long-term interest rates would react. Such a reaction was very clear to see in Italy in 2018. But France benefits from structural excess demand for core euro-zone government bonds; Demand for industrial products must not be stimulated to a level beyond what is compatible with France’s available industrial production capacity, which is low due to its stagnation. All this leaves little room for manoeuvre: no significant wage increase, no significant increase in the fiscal deficit, no significant stimulus for demand for manufactured products. The method being pursued in France in 2019, which leans on the fiscal deficit, is probably the least dangerous given the strong demand for risk-free bonds.