At home, François Hollande’s middle-of-the-road economic policy and apparent inability to make decisions has met with criticism from allies and opponents alike. But the French president should take heart: He has a friend across the Atlantic in Paul Krugman. The New York Times columnist praised France’s “exemplary fiscal policy” last week in a controversial column attacking Standard & Poor’s for daring to downgrade the country’s credit rating. The agency, relying on undisputed facts and without passing judgment, noted that French government spending is the highest in the Eurozone, even as growth is stagnant and unemployment is high. As a result, S&P forecasts that France will struggle to sell its Treasury bonds on the international market unless interest rates are raised—which will increase the debt. This is Economics 101.

Krugman is a Nobel Prize-winning economist, which forces us to pay attention to his pronouncements. But his attack on S&P and support of the big-spending Hollande government are part of his long political campaign against policies of so-called fiscal austerity. Since 2008, he has argued that greater levels of public spending and higher deficits would finally put an end to the financial crisis, leading to strong economic growth and full employment. Only France has followed Krugman’s advice, more by mistake than by choice, and with no conclusive results.

Krugman is right on some points: Standard & Poor’s and other credit-rating agencies have not proved terribly perceptive in recent years. They did not foresee the 2008 crisis. And downgrading a country’s debt only raises its interest rates, making the prophecy self-fulfilling. Krugman also rightly recalls that the connections between public spending, debt, and growth are not clearly defined. Yet he errs by blithely confusing the situation of the United States, which benefits from selling debt denominated in the world’s reserve currency, with that of Europe, which has considerably more difficulty finding buyers for its debt. France can therefore not allow itself the deficits Krugman advocates. Hollande appears to understand this, though to date he has not acted on it.

Krugman’s arguments create the false impression that a simple and direct causal relationship exists between budgetary policy and growth. Generating wealth and jobs is easy, he would have us believe; all you have to do is increase public debt. So why doesn’t every government do it? Because, according to Krugman, they obviously don’t care about the poor and unemployed.

Actually, budgetary policy is but one factor among many in the economic development of nations. History, tradition, corporate spirit, the role of the state, the opening of borders, migration, education, and national culture are equally important. As the economist and former French prime minister Raymond Barre would tell his students (I was one of them), a bad long-term economic policy is better than a good short-term one, because entrepreneurs think in the long term.

Economic stagnation in France is thus, above all, related to the unpredictable, unreliable character of Hollande’s policies. No one is investing or hiring; everyone is just waiting. France has lost its competitive edge. What the country produces can be found elsewhere (with the exception of luxury goods and tourism) for a lesser price. Krugman does France a bad turn by providing Hollande with cover for his harmful opposition to deficit reduction and by endorsing his belief that economic growth depends on government—when it is, everywhere, driven by entrepreneurs.


City Journal is a publication of the Manhattan Institute for Policy Research (MI), a leading free-market think tank. Are you interested in supporting the magazine? As a 501(c)(3) nonprofit, donations in support of MI and City Journal are fully tax-deductible as provided by law (EIN #13-2912529).

Further Reading

Up Next