Aghion on Hollande

Philippe Aghion has had a very influential academic career at Harvard; recently, he has been advising Francois Hollande and he explains the new presidents’s supply-side economic strategy in this FT article.

By the way,  the article also explains in passing:

Mr Hollande’s third main idea is that what is true for each individual country within the European Union is also true for the EU as a whole. In other words, the EU must pursue both budgetary discipline and a complementary growth package.

This applies even more to the eurozone. Foreign observers have been worrying about Mr Hollande’s use of the word “renegotiating” in relation to the European fiscal pact. However, to a large extent, the issue is semantic. His use of the word “renegotiate” refers more to the notion of combining the existing budgetary agreements with a growth package than to truly renegotiating the budgetary part of the project.

39 replies on “Aghion on Hollande”

Philippe Aghion may be a professor – but does he genuinely understand the current economic (sorry, its political economy, again!) situation? Perhaps he does, but that short piece is just the ususal waffle.

Europe will ‘grow’ again? How? What will Europe produce that the non-Europe world needs, and will pay for using a non-fiat currency? Selling amongst ourselves is no use.

“Ah! You mean its credit-bubble time again!”
“But the more credit, the more debt, the LESS my future income.”
“And how do I ensure my future income is more and more?”
“Why you grow and grow!”

This sounds like it is a reprise of something that is now ending rather badly.

re “renegotiate” not really meaning “renegotiate” – have mentioned this numerous times, so hopefully its starting to sink in.

Hollande will not be the slayer of austerity that some have perceived him to be. Austerity, ie budgetary discipline, is a fact of life and here to stay. What Hollande can do, and already to a certain degree has done, is push the accompanying need for growth and monetary stimulus (albeit the more restrictive EZ version) as the counterweight. But i think he realises there is no free lunch that some want.

What to expect?

This article does not answer the question.

First, France’s future depends on delivering all three of growth, social inclusiveness and budgetary discipline. No one element can be achieved without the other two.

Those are laudable aspirations but if they were easily achievable, they wouldn’t have waited for debt to rise to 90% of GDP while runnig a trade defict every yerar of the past 10.

Hollande has promised a whole lot of new expenses (new teachers,policemen etc.) in a country where public expenses are 56% of GNP . He has promised to raise taxes (again) ,but not nearly enough to reduce th budget deficit . The number of Frenchmen earning more than a million euros a year is not nearly enough for a 75% rate above that to have any effect.
In fact Hollande is a keynesian like Krugman who believes that public expenses are good, regardless of the debt burden already existing.
Our only hope is that Merkel will oblige him to respect the budgetary pact.

“His use of the word “renegotiate” refers more to the notion of combining the existing budgetary agreements with a growth package than to truly renegotiating the budgetary part of the project.”

You just can’t beat the way politicos backtrack and redefine once they actually win an election! Some of them are truly masters at it. Did you know there are several linguistics courses that they can go on to teach them how to phrase things so that they can backtrack later (you lost it in your translation matey, it wasn’t what I said)? Those and a myriad of master classes in body language, denial, being in front of cameras, gravitas and sincerity acting, etc. There’s a whole world of media and language coaching out there for them. Alastair Campbell took it to a whole new level for New Labour. Not sure Silvio ever went on the courses though… bunga bunga.

All said, I still wouldn’t mind being the proverbial fly on the wall when Merkel and Hollande meet. For all we know (and there’s plenty we don’t know about the two competing factions at the top), some of the people who really run the world have just given him a socialist label simply to get him elected at this time and he’s actually going off to Angela to tell her that the bosses are most displeased at the crap way Sarko/she’s been managing the situation and here’s how it’s going to be from here on in. These are your orders.

Socialist? Non. Gauche caviar? Oui. Nouvelle brosse? Improbable… but I’m still glad that ego with arms and legs sticking out formely known as Sarkozy has gone… and his immunity from prosecution.

I read a Ben Okri book once about the ‘Party of the Rich’ and the ‘Party of the Poor’ actually being the same people. Fascinating stuff.

I hope DOCM won’t mind me re-using here an extract from one of his comments on another thread:

“The blog almost certainly .. attracts many readers paid from the public purse who are plagued every working day by the requirements of some management theory or other (whatever is in vogue). Those insisting on such activity are whistling past the graveyard, to mix my metaphors even further, while waiting for the inevitable budgetary ax to drop.

In my view, no pressure for change will come from any other source. The inadeqaute nature of the design of the ax used to date (otherwise known as the Croke Park Agreement) will, it is to be hoped, become the stimulus for the honest, no holds barred, type of intellectual appraisal and analysis that is required.”

This FT comment piece, imo, is further evidence that, at the European level, we are beginning to see the “type of intellectual appraisal and analysis” DOCM desires among politicians, policy-makers and ‘public intellectuals’. The steps are faltering; various powerful vested interests have to be mollified; but, at the very least, there is a recognition that the nostrums of the past must be challenged and recast. Irealnd is so far out of the loop of this process that it might as well be on another planet.

With fiscal and monetary policy nailed down, the principal area where politicians and policy-makers have the opportunity to make a beneficial and decisive impact is the provision of infrastructure and utility services. These are the ‘sinews of the economy’, comprise a significant share of economic activity and provide the foundation for businesses to conduct their economic activities efficiently and for households to engage effectively in economic activity and to enhance their well-being.

Over the last 20 years the EU has pursued an approach of ‘liberalising’ the provision of these services. Coupled with a shift in the balance of ownership from the public to the private sector there has been an increasing reliance on ‘independent’ economic regulators in many of these sectors. In other sectors, with degrees of public and municipal ownership a ‘Pay-as-you-go’ (PAYG) model is used.

The mix varies from member-state to member-state. Ireland, for example, has its own mix. Electricity, gas, airports and telecoms are subject to ‘economic regulation’, roads have a mix of PAYG and public-private partnerships, rail and bus have a weird mix of state regulation and competition, local services (apart from waste collection in some areas) are generally PAYG – as are ports – and water is in transition from PAYG to economic regulation.

This dog’s dinner of state (or municipal) ownership, private sector participation and economic regulation is evident in almost every conceivable combination in all EU member-states.

For those sector where ‘liberalisation’ has been applied it has proved a total disaster. It was very convenient for politicians to establish so-called independent economic regulators so that they could demcorartic accountability for service quality and the increases in prices required to attract the investment to make up for thier previous policy failures. But the regulators have been doubly captured. They were never really released from political control and they have been captured by the busineses they were established to regulate.

They have in effect become the counterparties in ill-defined and incomplete contracts with the business in their sectors to provide long-term supply of services or network capacity as the case may be. The businesses (and their managements and employees) have the regulators over a barrel. If the regulators don’t award or ensure the revenues these businesses want the necessary investments will not happen and the lights migthn’t stay on, the gas mightn’t continue to flow, the boradband speed may slow, and so on.

The result is that final consumers (businesses and households) everywhere are paying over the top for inadequate services. The common perception is that these businesses are stuffed with overpaid and inefficient workers. It is true that they are generally well-rewarded, but they are not the problem. The problem is the structure, financing and regulation of these businesses.

The case for a different model for the structure, financing and regulation of these businesses was never more pressing. The economic benefits would be signifciant and widespread. There are indications that some others in the EU are facing up to this.

But in Ireland…well, we might as well forget it. Rent-seekers of the world unite lest ye put yer ill-gotten gains in jeopardy.

Again , despite the malinvestment over the Euro years continental Europe has superior infrastructure to both the US & UK… does not need so much “shovel ready” projects that will get us into even more debt to the banks but its Treasuries desperately need interest free money and in Dire cases such as Greece raw printing of currency.
This will increase the flow and reduce the waste inherent withen the euro system that can only “grow” using for the most part wasteful bank credit.

The UK has bought 28% of the buses in the Eurozone this first quarter !! In my opinion this is evidence of a relatively extreme monetary event withen the UK & lack of events withen Europe. – the UK has decided not to stop the flow as the eurozone has done to save a stock of debt.
But despite their extreme difficulties in the North Sea Sterling is strengthening.
This is quite extraordinary and somewhat similar to the Jap / Yen experience.
Fiat seems to be winning over the harder double entry money of the eurozone.
Saving money , a hypothetical construct by stopping the flow or increasing the stock of bank debt seems unsustainable.
It leads to empty buses and to waste.
The UK is now only consuming 1.4 MBD…. (mid 1960s levels) but its internal activity has not come to a full stop such as in Ireland & Spain.
You merely had effective good substitution which can do a hell of a lot.

Well, Aghion’s piece is a simple panegyric to Hollande. Some of us are waiting for the detail substance as we already got the broad brush stokes. I’m particularly interested in the financial reforms package when it comes. The “The eurozone should establish a unified system of banking supervision and deposit insurance” seems particularly useful; but some would argue, in Ireland and Spain, though better late than never, its too late.

The proposals re FTT aided by renewed pressure from the opposition in Germany may mean this becoming the bulwark of Hollande’s efforts to stimulate growth. These proposals may explain the race to pass the FC in Ireland before renewed pressure comes from Hollande vis a vis additional amendments to the FC with growth protocols, one of which is likely to be a proposal for FTT. Ireland may seek to torpedo FTT however contradictory this may appear to be !

Anyways, here’s a list of links re new FTT worldwide. Its now for some becoming a human rights issue. Hungary have excluded interbank lending from its version of FTT opening the possibility of different flavours.

Hungary to exempt interbank transactions

Global Human rights issue

@ Brian Woods Snr

Well said. I think it’s important to add that it is growth in the money supply that we’re dependent on. From there growth in GDP and employment will follow.

Currently the only source of new money for the economy is through bank loans but this creates a corresponding debt and so it’s not a realistic to assume that businesses and households will organise enough bank loans to return to growth. And we can’t print a significant amount of cash.

I think we need a third source of money to get us out of this recession.

CEO Jamie Dimon has been eating humble pie, ‘last man standing in 2008 on Wall Street”, regulators should probe with great attention to detail the JPMorgan $2B loss bearing in mind conspiracy theorists may be suspicious such losses are not recent, but may have been there concealed awaiting exposure through tougher regulations.

“How Will JPMorgan’s $2B Loss Affect Banking Rules?

“— Battle lines: Overhauling the rules governing this market, estimated at $650 trillion, has proved as complex as the investments themselves.”

— JPMorgan effect: Fairly or not, JPMorgan’s big loss on derivatives trades is likely to revive scrutiny of that market. That could give advocates of tighter rules some juice in ongoing negotiations with regulators. It also could empower those who believe the budgets of the CFTC and Securities and Exchange Commission should be increased to reflect the need for broader oversight. ”

What Hollande will determine should be imposed at European level to regulate this market will be crucial.

@PF: “I think we need a third source of money … ”

I have it from a reliable source that a genetically modified species of hemp (developed by an Irish horticulturalist) grows exceedingly well in Ireland. Produces abundant flowers with some interesting pharmacological properties. Woody stems. Good for mulching and kindling. Nicotine and alcohol free.

Afghan poppies grow all year round some in low-lying locations close to the sea – they are the fastest growing weeds you could imagine – up to 1.8 m tall. The flowers are magnificant (for a few days) and are very bee friendly. The green leaves can be mulched into an excellent source of organic bound carbon or dried and compressed into kindling.

The sunlight and rain are ‘free’.

@Brian Woods Snr

“…genetically modified species of hemp… Afghan poppies… ”

You may be onto something here…. if only we could have our own currency and just print like crazy, weaken new currency to make exports more competitive, throw the money we print at an international export ‘enterprise’ that only consumes locally produced/sourced raw materials and doesn’t cost a bomb to transport. And it will only take five minutes to train the unemployed to become pickers.

What could possibly go wrong?

@PR Guy @Brian
We live in a world of apparently free floating currency pairs except for a temp Swiss Franc / Euro Peg…. maybe the word devalue is obsolete now….

What is abundantly clear now is that the resourses are not available to waste on credit hyperinflation / malinvestment / “growth” so as to pay for interest on sovergin debt.
But that does not mean you cannot have growth via Fiat production as you cannot get growth without some form of money production , money does not have to come from a commercial bank.

Sterling is increasing in value relative to the Euro recently….just saying like.
But how will that effect its exports ?
Don’t know where all those buses they are ordering are coming from but if I had to guess many are Alexander Denis vehicles.
Dublin Bus , Bus eireann & Ulsterbuses have always ordered large amounts of these vehicles.
I did not think Sterling would strengthen by this much to be honest ,
our bus fleet is getting older me thinks.
What is CIE to do ?
It must eventually buy more of these I imagine

As these older Volvo / Alexanders are not get any younger.

But maybe the plan is to just depreciate the fleet to a couple of dozen vehicles or something ….

@The Dork of Cork

“I did not think Sterling would strengthen by this much to be honest ”

Tell me about it, I meant to pick up my Sterling last week for the trip over to the Heineken cup final this weekend. I forgot. Now look at it.

Greek crisis
The euro exit is a bluff
15 May 2012 La Stampa Turin

The voters’ verdict is already in across several countries and regions: the cure based strictly on austerity within the eurozone has failed. What needs to be done now is to take that reality on board and to start negotiations that promise to be trying and that may lead to awkward compromises.

Greece, though, must be ready for anything. And it must distinguish between the reality and the threats and blackmail that are flying about at the moment.

…. and we know a good bit obout bluffing around here on the Fiscal Corset … plague of locusts spotted over Castlebar ….


Er, I don’t think this is a joke.

Its the power of Fiat (issue and tax) without interest – its beating the Goldbugs down.
Damn – never get consumed by the precious…….my precious my precious.

If the Euro goes, Gold will crash as the strange events of 1999 , Browns Bottom and all that was to do with the Euro double entry system coming into full operation.

Some would say Sep 11 ….. but perhaps thats a bridge too far for most people who want to believe in something good and wholesome behind the curtain.
Best to just look at bridges and become a even sadder Bus spotter that train spotters look down on.
Parnell Bus station Cork

Empty buses & heavy private car traffic in a energy crisis is a purely monetary phenomena , you are witnessing a defective monetary system in operation.

What is the reason you expect a euro implosion to bring gold downwards?
Gold ownership is the ultimate protection against currency debasement, at least thats what ive read. Why is gold not a protection against a euro breakup.?

I believe the only real base money the euro can create is via Gold on the asset side of its balance sheet and euros on the right.
The tougher the fiscal rules the higher Gold must go so that enough medium of exchange is available to pay the bank debt.

This is a battle between Henry the 1rst idea of money – pure fiat (although it is greatly compromised by the bankers in the UK & US) and the gold merchants vision of money , possibly another sect.
Remember money is only a psycological construct – its is not a physical product really.
I hold a slightly different view to both , I think a country should have the right to produce as much fiat as it thinks it should although for international dealings you would need a international reserve that not one country could dominate.
The disadvantage of this is that the bankers own most of the Gold… but not all I suppose.

Hold some of the shiny stuff but do not let it corrupt you.
You need to be strong to resist its calling

Don’t take my investment advice as gospel please , I am merely a small Hobbit who lives in a hole.

@ Holbrook Fields

I posted this link with another from the Guardian on another thread.

N.B. in particular the second link.

The arguments advanced are valid except, of course, the idea that the economies are somehow autonomous. The very opposite is the case. Germany has been very effective in limiting access to the German product and labour markets in order to protect the many weak sectors of her economy. This has served to make the problem of imbalances even worse.

Main stream macro-economic debate is either unaware of or chooses to ignore the simple reality that, apart from the euro being a currnecy without a country, it is also a currency area without a properly functioning internal market. Ask any business man to contrast doing business across Europe with doing the same in the US!

Problem of course is that world gold production has stagnated……impacting the supply /demand dynamic.

Not so sure I agree that it will decline in the longer term, although all commodities (incl. gold) will no doubt fall significantly in the short term following a euro crash… a function of financial fear and fear of a depressed global economy /commodity consumption (also in the shorter term). That likelihood is already evident: gold at $1,554.50, going down, as I write.

Holbrook – The German executive are not fools … their export products are very credit senstive , which means if the rest of Europe goes back to full fiat currencies their products & Industrial base will be wiped out as we will have loads of money for bus tickets and Pints but little credit for BMWs.(I think 15 -18% of their exports is cars alone)

They have merely formed a close alliance with the bankers as their goals converge at this point.
I really don’t believe in this acedemic shell game nonsense – if you really believe in your own bullshit you will get into very deep trouble eventually.

Remember most bankers hate Fiat as it takes their leverage power away…. the really don’t care if their leverage games are disastrous or not… they just want the ring of leverage power in their hands.


Lots of potential for EU banks to be forced sellers of gold in a Euro crisis. Yes gold might be an anti-debasement asset at some point, but be very very wary of taking a simplistic view of any financial asset.

Having said that, the current investor sentiment towards gold is extremely bearish. That is a bullish indicator.

Many gold investments are structured so the investor is a senior unsecured creditor. That may be relevant depending on your rationale for considering it as an investment.

@ Dork, PR Guy

Very interesting times in the FX markets. Consensus is expecting a large, rapid decline in the euro (although caveat again – the fx markets are notoriously volatile).

To be exacerbated by decline in commodity jurisdiction currencies based on falling commodity demand from China.

With a stronger US$ (Canadian $ has been going gangbusters also), the euro cost of oil /energy is one to watch. Significant potential for energy inflation in particular in the eurozone.

Bloomberg recently reported a near 30% increase in US natural gas production, due to increased domestic production. Fracking has been a big driver. Has resulted in very low gas consumer pricing….

Ireland has huge natural gas reserves apparently – but need fracking to release. It’s an area that Ireland needs to explore.

I think ‘academic career at Harvard’ tells us all we need to know probably. If this is where Hollande is getting his economics from, it’ll be same old with a different label.

So, we had Blair, then Obama, now Hollande…

Language completely debased. Bernays’ world fulfilled. (‘Century of the Self’ is a free download from for those not familiar with Edward Bernays.)

Bilderberg end of the month, so no important decisions before then. June could get interesting.

@paul w

“Very interesting times in the FX markets. Consensus is expecting a large, rapid decline in the euro (although caveat again – the fx markets are notoriously volatile)”

There are currently near saturated fx futures positions by historical standards, with large speculators very short Euro/dollar. The short Euro futures position on aggegate of small speculators has been big, but has got extreme in the last few weeks. Sometimes they are right, but not very often.

This is consistent with there being few sellers left below about 1.26 without actual, proper news of something occuring that hasn’t been discounted – so if something is cobbled together in Greece and the boot hits the can again, there could be a bit of a squeeze.

@ grumpy
Germany and France came out with a “softer” approach this evening. What that means in reality remains to be seen. The Euro has been in a strange range for awhile…..difficult to explain…I haven’t seen a really good explanation of why it has been trading stronger than its circa 1.28 type long term average (since inception) level (albeit haven’t looked at that for awhile). However, [$, interest rates] QE of one sort or the other has held it up….as have the Chinese. It has been artificial at best. Remember however that it wasn’t too long ago that we were at 1.18….and there is absolutely no reason why we aren’t going there (and beyond) soon. This could get ugly…..I sense that it is “different this time”….There’ll be some ups and downs (and its very difficult to get timeframe correct)…but the direction is down. Softening EM /China demand is a gamechanger……But the US still has room for manoeuvre to delay the trend.

@ All

It does not seem that Aghion is fully up to speed on Hollande’s thinking if this press report is any guide.

He has not (yet) abandoned his desire to “re-negotiate” the TSCG, in whatever sense the word is to be taken. What he says is that there wll first have to be an agreement on the points at issue, then a debate on their legal form.

For some participants in the discussion, this might be seen as confirmation of the view that the TSCG should either be rejected or the referendum delayed (which, it seems, is not an option). A more realistic reading, however, would be that the main protagonists are largely indifferent to the issue of the outcome of the referendum in Ireland (other than to draw appropriate advantage in the political debate from whatever is the result).

@Paul W

“Germany and France came out with a “softer” approach this evening”

Don’t read anything into that. They HAVE to say the right things to try to calm markets at the moment so will say anything/whatever it takes – which may or may not be the truth. You can’t tell. They won’t take any flak for those bland statements whether Greece leaves the Euro or not.

I posted here some time ago that I thought Euro was on it’s way down to €1.25 and from there it was turtles all the way down. Parity next? Below $1 just before break up? I was working in the States just after the Euro was launched and everyone over there always called it the “Eurodollar” because it was always assumed the average would be 1:1 and that Europe was in some way trying to ‘dovetail’ with the USA.

On the subject of growth, the new philosopher’s stone, how much will operations such as this add to ireland’s fabled GDP?

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