French Socialists purge far-left wing Krugmanites from government

Update:  I’ve been told that Mr. Montebourg is a strong foe of the ECB’s tight money policy.  So don’t take this post as a blanket criticism of his views.  He’s right about the ECB.

The French government spends 56.1% of GDP, one of the highest ratios in the world.  Even the relatively left-wing Hollande thinks that’s enough.  But believe it or not there is (or was) a faction in the government that thinks France’s problems are caused by not spending even more.  Here is the FT:

François Hollande has purged his embattled Socialist government of leftwingers opposed to EU austerity after a revolt led by Arnaud Montebourg, the flamboyant economy minister.

Mr Montebourg quit the cabinet on Monday, delivering a blistering attack on what he called “absurd” austerity policies – supported by Mr Hollande – which had brought about “the most destructive crisis in Europe since 1929″.

The outspoken minister said in a televised statement that the eurozone’s fiscal stance was “the cause of the unnecessary prolongation of the economic crisis and the suffering of the European population”.

The cabinet crisis was triggered by figures this month showing there had been no growth in the French economy in the first half of the year, with unemployment continuing to rise.

So where did Montebourg get the crazy idea that even more spending would solve France’s problems?  Here’s the BBC:

Did Paul Krugman help topple the French government? According to Business Insider’s Rob Wile, the New York Times columnist “deserves some of the blame”.

The proximate cause of French President Francois Hollande’s decision to call on PM Manuel Valls to form a new government was when two senior ministers criticised the nation’s economic austerity policies. Mr Holland has requested that the prime minister form a new cabinet – certainly without the two offending officials – by Tuesday.

Wile notes that one of the officials – economic minister Arnaud Montebourg – directly quotes Krugman in his controversial comments to Le Monde. Here’s Mr Montebourg’s response after being asked whether Europe has tilted too far toward austerity:

That’s not my observation, that’s the diagnosis of financial institutions across the world, starting with the IMF which, whose director, Christine Lagarde, warned European leaders about an excess of budget consolidation. Paul Krugman, a Nobel laureate, also wrote on Aug. 13, “The nightmare scenario in Europe is not a hypothetical. The news that industrial production has ground to a halt raises the prospect of a new recession in Europe  its primary cause, austerity.” These warnings have also been sounded by other leaders of world powers including Barack Obama.

If Mr. Krugman’s views are no longer welcome in Paris, I wonder what country would be willing to adopt his strategy.  Cuba’s G/GDP ratio is at 66%, probably a tad high for even Paul Krugman. And don’t forget that this is the guy who thinks market monetarists are a failure because our views aren’t popular with GOP Congressmen.

PS.  Mean-spirited Sweden’s government scrapes by spending a measly 51.2% of GDP.

HT:  Patrick Sullivan



34 Responses to “French Socialists purge far-left wing Krugmanites from government”

  1. Gravatar of Biased Stats Biased Stats
    26. August 2014 at 04:42

    Dear Scott,

    Arnaud Montebourg, the left-wing minister that just got fired from Hollande’s government, is not arguing in favor of higher spending as a share of GDP, but in favor of slowing the speed at which deficits are reduced.

    His plan is to cut spending by 2.5% of GDP, and use this cut in spending to give back 0.8% to households, 0.8% to firms, 0.8% to deficit reduction. By Krugman’s standards, even Montebourg is still an austerian because his tax cut doesn’t match his spending cut. It’s nevertheless a critique of Hollande’s plan, who want to reduce the deficit by more than 0.8%, and give tax cuts mainly to firms.

    I like your blog and have been following you for years, but please don’t misportray France’s politics.

    Thank you

  2. Gravatar of Matt McOsker Matt McOsker
    26. August 2014 at 04:59

    Sweden runs a trade surplus, and France a trade deficit. Sweden is fiat, France is not. They are in a different position than France IMO.

    My advice to France is leave the Euro as it is flawed. Might be messy (might not be that messy) in the short term, but longer term France can at least have key mechanisms at their disposal to manage their economy. The longer they stay in the ECB, and the more Euro debt they rack up, France will be in trouble long term if the ECB remains inept, and the Euro remains flawed.

  3. Gravatar of meegs meegs
    26. August 2014 at 05:22

    What’s interesting is Krugman presents such a one-sided view. Only an idiot could possibly want austerity!

    I had not seen that 56.1% figure. Thanks for the post.

  4. Gravatar of Brian Donohue Brian Donohue
    26. August 2014 at 05:36

    Nice post. Your work documenting this stuff in real time is precious. Keep on keepin’ on.

  5. Gravatar of Elwailly Elwailly
    26. August 2014 at 06:20

    To be fair you should note that Krugman isn’t advocating permanent government increases as a goal in itself. He is simply acknowledging the utility of increasing fiscal spending temporarily to boost demand. This is especially true when the central bank is limited in it’s ability to boost NGDP by political consideration (which is the polite interpretation of the ECB’s posture).

    Krugman may be a liberal, but this is a separate issue. Implying he has a secret agenda to increase government at all times is just as ridiculous as implying you have a secret agenda in your writings to decrease government at all times.

  6. Gravatar of ssumner ssumner
    26. August 2014 at 06:38

    Elwailly, You said:

    “Implying he has a secret agenda”

    I’ve never implied Krugman has any secret agendas. All his agendas are very public.

    In any case, he has argued that the recent demand shortfall is permanent, not temporary.

  7. Gravatar of ssumner ssumner
    26. August 2014 at 06:55

    Biased stats. Good point, but you might want to try this exercise. Look at the French government’s announced intentions for the deficits over the past 10 years, and then look at the outcome each year. I predict that errors will be serially correlated.

    One other point, If you are right that the differences are not that great (and I have no reason to doubt you), then Montebourg’s language seems rather absurd.

  8. Gravatar of Biased Stats Biased Stats
    26. August 2014 at 07:08

    Obviously the French government is bad at inconditional forecasting, but it doesn’t change the fact that the structural deficit (excl interest) has decreased rather quickly over the past 5 years, from -3.7% of Pot GDP in 2009 to -0.7% according to the European Commission.

    Moreover, even if you support the idea that monetary policy can always offset fiscal policy, you must recognize that the ECB’s unwillingness to offset deficit reduction means that demand is shrinking with the deficit, and explain partly why the french government repeatedly missed its targets.

    Finally, Montebourg never said that G/GDP must be increased, he said, as you quoted him, that “an excess of budget consolidation” is to blame for slowing growth in Europe. He also criticized the ECB and I’m sure you must agree with him on that point.

    I agree with Elwailly on that point, criticizing austerity and pushing for higher spending are not the same thing.

  9. Gravatar of ssumner ssumner
    26. August 2014 at 07:15

    Biased stats, Maybe that’s considered a fast reduction today, but for someone of my generation it seems really slow. Business cycle recoveries used to be pretty quick, and deficits generally fell fast during recoveries. On the other hand France had a recession in 2011-12 which the US didn’t have.

    I don’t believe that austerity has anything to do with the most recent eurozone recession, the US has done more austerity since 2010 than the eurozone. It’s the ECB that is to blame. And on ECB policy Montebourg and I agree.

  10. Gravatar of ssumner ssumner
    26. August 2014 at 07:20

    I should add that I don’t think it’s just that they are bad at unconditional forecasting, but rather they fib about the likely outcome of their policies to please the Germans.

    There’s also some ambiguity in Montebourg’s claim that spending cuts caused the recession and your discussion of PLANNED spending cuts. It would be interesting to see how French government spending as a share of GDP has moved in the past few years. Didn’t Hollande increase spending on first taking office?

  11. Gravatar of Mattias Mattias
    26. August 2014 at 07:26


    Where did you get the 51% number from? I thought we had cut it to around 46-48% just below Denmark. On the other hand, we’ll probably be back over 50% again soon, since the left and green parties are leading the polls with a wide margin. The election is 9/14.


  12. Gravatar of Elwailly Elwailly
    26. August 2014 at 07:38

    As Nick Rowe says “The ECB cannot move last”. Given that the ECB moves first and that you agree with Montebourg that their policy regime is faulty, why would you disagree with Montebourg?
    What should be France’s rational response to the given ECB policy stance?

  13. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    26. August 2014 at 07:49

    Montebourg asked for a new government…and got one…without his participation. He’s also the guy who threw a hissy fit when the American CEO of Titan Tire refused to consider buying France’s Goodyear plant.

    ‘The CEO of a US tyre company, who refused to buy up a troubled Goodyear factory in northern France, launched a virulent counterattack on Friday against “stupid” French Industrial Renewal Minister Arnaud Montebourg in an increasingly bitter quarrel.

    ‘Montebourg had accused Titan CEO Maurice Taylor – who on Wednesday said his company would not re-enter negotiations to buy the plant due to the ‘crazy’ French unions – of being an “extremist” who didn’t understand France or the French.

    ‘Taylor told Europe 1 radio on Friday: “Why is he getting at me like this, your minister? Is he stupid or what?’

    Then Montebourg told Mittal to take its jobs and shove them somewhere out of France.

  14. Gravatar of Peter K. Peter K.
    26. August 2014 at 08:13

    I don’t think this is fair to Krugman or Montebourg in this way. Think of the French government’s fiscal stance as a reaction function the ECB.

    Now is not the time for austerity and reducing the deficit. It’s not about the size of government. They could be doing 100 percent tax cuts to businesses and wealthy “job creators.” And then when the NGDP level path is stabilized, balance the budget and reduce the deficit by cutting government spending.

    Krugman and Montebourg agree with you on the ECB as you say.

  15. Gravatar of Biased Stats Biased Stats
    26. August 2014 at 08:30

    Yes, US had more austerity but the Fed offset it. The fact that the ECB didn’t do its job led austerity policies in Europe to be contractionary. I agree that we should mainly blame the ECB for that. But GIVEN THAT the ECB won’t move, maybe it’s better for Europe to stop reducing the deficit.

    The deficit fell fast during previous recoveries because we used to have better recoveries and not because the structural deficit was reduced : just let the automatic stabilizer do their job.

    For instance, here is France NGDP growth, structural balance and total balance(excl interest) from 2009 to 2013 (from Eurostat):
    2009 | 2010 | 2011 | 2012 | 2013
    NGDP -2.9 | 3.0 | 3.0 | 1.5 | 1.1
    SBal -3.7 | -3.5 | -2.2 | -1.3 | -0.7
    Bal -5.0 | -4.6 | -2.5 | -2.3 | -2.0

    In 2010, structura

  16. Gravatar of Biased Stats Biased Stats
    26. August 2014 at 08:45

    Yes, US had more austerity but the Fed offset it. The fact that the ECB didn’t do its job led austerity policies in Europe to be contractionary. I agree that we should mainly blame the ECB for that. But GIVEN THAT the ECB won’t move, maybe it’s better for Europe to stop reducing the deficit.

    Again, you’re saying that Montebourg blamed past spending cuts for the recession, but he did not. He only said that austerity was harmful. I don’t know whether he thinks that only austerity WITHOUT ECB offset is harmful.

    Indeed, public spending increased since Hollande took office, but most of it comes from reduced growth, he did not actively pursued a policy of increased spending.

    The figure is closer to 53% if you want to compare with other countries

    Basically, the story is : because of ECB, NGDP growth slowed. Because of slow NGDP growth, spending is higher and revenue is lower. So Hollande decides to raise taxes to meet european targets. Because of ECB, austerity is contractionary. So growth is lower than expected and target is missed. So Brussels pressures Hollande to reduce deficit more. And so on…

  17. Gravatar of Student Student
    26. August 2014 at 09:11

    Biased, I have never seen someone get the best of scott before. I dont know france well at all, but i think your up on the judges card right now.

  18. Gravatar of J Mann J Mann
    26. August 2014 at 12:29

    Biased Stats, I think Scott would agree that if the ECB is operating without regard to fiscal stimulus, then you could expect fiscal changes to have effects on the macroeconomy.

    I guess the next questions are whether you can afford it as a nation and whether it’s politically feasable to increase govt spending when you’re already at 56% of GDP.

  19. Gravatar of ThomasH ThomasH
    26. August 2014 at 14:09

    The quote from Krugman is about austerity not about the ratio of French G to French GDP. It might be taken as criticism of Hollande’s increase in the top marginal tax rate. Is there a role for fiscal policy (investing in projects beyond those that have positive NPV’s when evaluated at the ECB set interest rate) when monetary authorities are not keeping NGDP growth but are unlikely to increase interest rates in response to an increase in the fiscal deficit?

  20. Gravatar of Major.Freedom Major.Freedom
    26. August 2014 at 17:16

    The CFR is now “testing the waters” for helicopter drops.

  21. Gravatar of prakash prakash
    26. August 2014 at 19:32

    Though not a fan of hybrid fiscal monetary solutions, I believe this may require one.

    France reissues the frank in purely digital format. Pays all guv employees and pensions partly in digital franks and partly in Euro. Every frank is announced to be equivalent of 1 euro for tax payment. A market develops in franks as businesses that want to reduce their taxes (not pay them in euro) take these from the government employees. The discount of the frank in the market wrt. Euro acts as an automatic deficit reduction. The franks are issued till the ngdp catches up and phased out afterwards.

  22. Gravatar of happyjuggler0 happyjuggler0
    26. August 2014 at 19:51


    Your idea reminds me of the “Wörgl Experiment”, a brilliant idea to increase the velocity of money in Austria during the Depression:

  23. Gravatar of happyjuggler0 happyjuggler0
    26. August 2014 at 19:56


    The town in question was in Germany, not Austria. I should have reread my link before submitting it. 😉

  24. Gravatar of happyjuggler0 happyjuggler0
    26. August 2014 at 20:05


    I think I was right the first time. The beginning of the article says it was in Germany. The end of the article says it was in Austria. Wikipedia says that Wörgl is in Austria.

  25. Gravatar of ssumner ssumner
    27. August 2014 at 05:40

    Mattias, I got it from Wikipedia, probably out of date. The right deserves to lose after their brain dead monetary policies. It’s a pity, as their other policies were good. Will conservatives ever learn?

    Elwailly, I don’t agree, the ECB does move last vis a vis the eurozone, which is the relevant issue. It’s a eurozone problem. In any case, if I were the French I’d do massive supply-side reforms. The last thing they need is more government spending. I’d also tell my representative at the ECB to oppose the Germans.

    Peter, You said, “They could be doing 100 percent tax cuts to businesses and wealthy “job creators.” And then when the NGDP level path is stabilized, balance the budget and reduce the deficit by cutting government spending.”

    I agree, but I doubt Montebourg would go for that. We know that Krugman recently advocated higher taxes on the rich, so he’s willing to bash the rich even if it costs jobs for the unemployed.

    Biased, No, monetary policy determines NGDP growth. Period, end of story. If the ECB is determined to adopt a tight money policy then no amount of fiscal stimulus will offset that. It will simply produce more Greeces.

    As far as 53% of GDP, I’ve noticed that every single source gives a different figure on this data, as there are all sorts of judgement calls as to what “counts” as government spending. In any case, France is higher than almost all other countries under any reasonable metric.

    As far as the much higher taxes on the rich, that’s a policy Paul Krugman favors, so Krugman has no complaint on that score.

    France needs two things, easier money and massive supply-side reforms. More government spending will simply push them deeper into supply-side problems.

    I do agree that the tax increases were contractionary, for supply-side reasons. And note that this post did not mention taxes, it was focused on government spending.

    I agree that deficits fell faster in earlier recoveries because of faster growth. My only point was that the reduction in the deficit you cited was not particularly fast. I agree that with better ECB policy the deficit would have come down faster.

    Bottom line, Krugman supported the huge tax increase on the rich. I opposed it. What do you and Montebourg think about it?

    Student, Yes, he’s a good debater.

    Thomas, Krugman supported the higher taxes on the rich.

  26. Gravatar of TravisV TravisV
    27. August 2014 at 06:56

    Prof. Sumner,

    What do you think about Kevin Erdmann’s forecast that interest rates will increase (see below)?

  27. Gravatar of Zachary Bartsch Zachary Bartsch
    27. August 2014 at 08:02

    Great point on the ECB determines NGDP. But I’m not sure that I agree that fiscal policy will have no effect. If the ECB is targeting NGDP, then you are certainly correct – G won’t do anything because of offsetting.

    If the ECB is targeting inflation – or something else besides a nominal aggregate, then can’t the French government affect their NGDP because the ECB is not offsetting [by construction]? With elastic supply, wouldn’t greater G increase real output and NGDP? I’m no socialist, but it seems to me that the door for greater NGDP is open when the monetary authority is indifferent to NGDP.

  28. Gravatar of TravisV TravisV
    27. August 2014 at 12:10

    Christopher Mahoney just wrote a new blog post:

    He ends with the following:

    “In my view, falling bond yields provide conclusive evidence that the market does not expect higher bond yields. The evidence to date suggests that bond yields are already normalized and that the elevated equity premium will persist until stock prices rise to much higher levels. In a later article I will explain further why I don’t expect higher bond yields or higher inflation.

    Investment Conclusion

    The taper has resulted in higher bond and stock prices. The end and eventual reversal of QE should provide further support.”

  29. Gravatar of Mattias Mattias
    28. August 2014 at 00:52

    On the other hand, Sweden will change it’s formula for calculating GDP in September so then our debt and tax ratios will look better. The new GDP figure will be ca 5% higher than the present one.

  30. Gravatar of ssumner ssumner
    28. August 2014 at 11:26

    Zachary, Yes, when I say fiscal would be offset, I mean demand side fiscal. There are lots of supply-side fiscal options for improving the P/Y split.

    Travis, I can’t predict rates, I’d just go with the market forecast, which says rates will rise, but remain lower than normal.

    Mattias, That’s one way to solve the problem!

  31. Gravatar of Joe Eagar Joe Eagar
    2. September 2014 at 18:45

    Wasn’t Mr. Montebourg referring to the eurozone-wide austerity drive itself, not France’s efforts in specific? That’s hardly a left-wing statement, certainly not if you believe that tight ECB policy is Europe’s biggest problem.

    This isn’t hard. Germany is violating the first law of monetary unions: thou shalt not use monetary policy to prevent thy balance of payments from adjusting in the presence of a trade surplus.

    America did this and set off the Great Depression. Germany is making the same mistake.

  32. Gravatar of Zachary Bartsch Zachary Bartsch
    2. September 2014 at 19:36

    Scott, I communicated unclearly. Since the ECB isn’t targeting a steady growth path for MV, then can’t France increase V via demand side fiscal spending? The government DOES influence real variables – and because the ECB target is inconsequential to MV, then doesn’t it stand to reason that MV will rise with a rise in V? NGDP is not purely nominal – when the ECB neglects it, then can’t adjusting the real variable affect it? (I mentioned supply only to point out that greater demand could result in less price increases and more output increases – But it need not be so)

  33. Gravatar of Joe Eagar Joe Eagar
    2. September 2014 at 19:54

    Zachary, you are basically making the old observation that countries in fixed exchange rates should use fiscal policy to manage aggregate demand.

    The problem is that in currency unions, the end goal of aggregate demand management isn’t low unemployment, it is balance of payments equilibrium. If France wants to use fiscal policy to reduce unemployment, it must convince a surplus country–say, Germany–to do the same, or it will experience a balance of payments crisis.

    The U.S. model, that Europe originally tried to reproduce, is that monetary policy should produce higher inflation in surplus countries than deficit ones, with the goal of spreading the burden of adjust evenly across both deficit and surplus economies.

    Unfortunately, a combination of German inflationphobia and regulatory disharmony has kept that from happening in Europe.

  34. Gravatar of ssumner ssumner
    6. September 2014 at 18:09

    Zachary, If only France does the fiscal stimulus, it may boost M*V, but it might also worsen the P/Y split for supply-side reasons.

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