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„Buy French!” … and a look at the causes of stagnation

Published on April 18, 2012 by: in: Economy
Nicolas Sarkozy, coming into the home straight of the presidential campaign, is urging the French to spend their money on locally manufactured goods. His rival, Francois Hollande, also spoke in similar vein recently, albeit in a less nationalistic tone. But in essence they are both saying the same thing – that Europe must protect its markets both by encouraging home grown consumption as well as by restricting access to outsiders.

photo: WordRidden

photo: WordRidden

Both candidates condemned outsourcing to countries with lower production costs, especially those in Central and Eastern Europe. Sarko proposes to do this with tighter borders and the fuelling of anti immigration paranoia. To stimulate the European economy, the candidate for the right is even suggesting supporting European companies by offering them public works contracts. This is a very French approach. Expatriated French companies are known to stick together. They usually hold accounts with French banks, drive French cars and favour French telecom providers. The long term usefulness of this approach should be questioned. It’s high time we put the spotlight on what is wrong with Europe and whether such an approach is the best one.
The economic crisis has wreaked havoc in people’s minds. In 2009 – the epicentre of the crisis – capitalism was pronounced dead and Keynes was on everyone’s lips. This triumph was however short lived because a mere year later the crisis had lurched into a fiscal debacle. Economic stimulus on the back of government borrowing just didn’t work. Moreover in extreme cases this even led to a critical loss of liquidity. At the same time it became clear that countries ignoring the effect of protectionist policies on competitiveness, slow down. And if debt piles up – be it private or public – distrust mounts and in extreme cases there is a risk of insolvency.   Italy is an example of this. For a whole decade per capita GDP growth was -0.25%. In other words, during those ten years there was no growth and thanks to a longstanding high level of debt (120% of GDP), it lost the confidence of the markets regarding its ability to service that debt. There were reasons for that lack of growth.  It’s worth recalling the time when Italy decided it would be better to make Fiat 500s in Italy. Obviously this was about supporting Italian industry and protecting local jobs but manufacturing costs went up and so did the price of the car, thus making it less competitive. This was not an isolated incident. When it became the norm, Italy lost its competitive edge. Common protectionism masquerading as defence of local jobs.
At the other extreme is Germany which massively takes advantage of cheap labour from Central and Eastern Europe which has now become the backbone of German car production and other industries. The Germans don’t urge anyone to buy German goods because people want to do that anyway. No one fights outsourcing and Germany is still competitive. Their main problem is low internal demand and over-reliance on exports. Of course they have benefitted from the weak euro but none of this just manifested out of thin air. For the past ten years Germany has kept wages in check while in most countries in southern Europe and in France, wages grew and grew.
Unfortunately these cause and effect relationships are very complicated. People tend to reach for protectionist slogans especially in countries with a socialist tradition like France. It’s difficult to tell to what extent either presidential candidate is speaking sincerely or just electioneering. But words uttered during an election campaign tend to be remembered.   Whichever way you look at it, a scared, crisis ridden Europe is slowly bringing in reforms, while harbouring protectionist convictions in petto. But the pleasant, civilised and well liked european model is simply not globally competitive. Fortunately the German example shows how to be both European and competitive. But this can only be achieved with hard work and a constant search for fresh competitive advantages. The credit fuelled days of wine and roses are over.

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About Ryszard Petru

Economist, until recently director concerning strategy in BRE Bank. He was also an advisory to Leszek Balcerowicz and a specialist of the World Bank.

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