National loan or European equity participation?

The announcement of plans for a new national loan is another example of Nicolas Sarkozy’s tactical skill. Helped – sadly ¬– by the economic illiteracy of our fellow countrymen, he is turning the mortal sin of excessive national debt into a miracle cure to fund new forms of future investments. Instead of endlessly and fruitlessly demonstrating every month about the impact of the crisis, the social partners are being asked to come up with new spending ideas for which miraculously painless, virtuous and virtually unlimited funding appears to have been found. The taxpayer, who had every reason to fear that the mountain of debt would lead to an increase in his taxes, ends up being turned into a virtuous investor who will be financially rewarded for his valiant patriotic contribution to national recovery. In so doing, the President is gaining time to keep the general public quiet until the recovery plan that was agreed a few months ago really starts producing positive results.

The risk with this ‘political’ loan, in the strongest sense of the word, is that it might give our fellow countrymen, who are always only too ready to wriggle out of whatever efforts are needed, the idea that we once again have a pot of money big enough to solve all our problems painlessly. This brings to mind the surreal debate that took place under the Jospin Government, when there was an unexpected reduction in the huge budget deficit at the time: the ruling and opposition parties competed with each other to come up with proposals for new expenditure, in the mistaken belief, as they rubbed their hands with glee, that a smaller deficit meant more money to spend!

However, if this initiative is well planned, it could provide the French people with a deeper understanding of today’s world and help to restore their faith both in their own economy and in Europe. This means coming up with original solutions, but why should economic creativity be the monopoly of the financial whiz kids who are eager to maximise their personal income at the expense of the general interest?

To avoid any unhealthy temptation from the outset, two safeguards must be put in place.

On the revenue side, it would be outrageous if this public loan were to increase the French Government’s huge mountain of debt – over €1 trillion. Members of the public – ‘investors’ – should therefore be asked to take the place of some of the financial intermediaries who buy Treasury bonds all year round. There also should be no let-up in efforts to bring about a much-needed cut in unnecessary public spending, an issue that France has been very slow to address.

On the expenditure side, it would be inconceivable to start financing operating expenditure by borrowing again, a situation worthy of the Ancien Régime from which France had only just started to emerge before the crisis hit. As for investment expenditure, all public projects that were ready for implementation have already been taken into account in the recovery plan. Consequently, there can be no question of financing an increase in public spending, which already exceeds 55% of GDP – a world record.

If there is to be no new revenue or expenditure, what exactly is the point of the whole venture?

To prepare for the future on a new basis.

We should not put the blame for our failures on ‘unfair’ competition from our partners in Eastern Europe and emerging countries: over the past 10 years, French industry’s share of value added in the industry of the euro zone alone has fallen by a third! Apart from the pernicious effects of the 35-hour week, what is the major weakness of the French economy? It is the chronic lack of industrial investment. Which congenital disease is affecting our businesses? It is not a low birth rate, but dwarfism: small businesses are being set up in all sectors of the economy, and the tempo has increased even more dramatically with the new tax rules for those setting up businesses. However, a curse is preventing small enterprises from becoming medium-sized and medium-sized enterprises from becoming large: all the French multinationals that exist today existed half a century ago, while all the multinationals that were set up as a result of the computer and internet revolution were established 20 years ago by penniless students in a garage in California. Similarly, the likes of the larger ‘Mittelstand’ SMEs, which are the driving force behind German industry, are few and far between on this side of the Rhine.

Why not use the money raised by the State for industrial research and investment, particularly in new technologies? Subscribers would have the choice between lending to the State against a fixed interest rate subject to ordinary taxation or acquiring a stake in a start-up or in an innovative company of their choice. They would be guided by a credit rating assessment carried out by a specialised body along the lines of OSEO, a public body that provides assistance and financial support to French SMEs. It would cover all the aspects of risk participation: if the company failed, they might lose the capital invested; if it succeeded, there would be the prospect of high dividends and capital gains. A new feature would be a capital gains tax exemption on such holdings for at least five years. There would therefore be a strong incentive for individuals in France to all become ‘business angels’. The principle of fair taxation would benefit: why should this kind of advantage be reserved, as is currently the case, for those liable to the solidarity tax on wealth (ISF)?

Another virtue of this scheme is that it would be almost automatically extended to European companies. This is because EU law prevents us from granting public aid only to French companies. In developing its plan, France could propose that either the European Union as a whole or those of its partners who were interested might follow its example. Europe would thus provide itself with the resources to move closer to achieving the objective that it set for itself nearly a decade ago in Lisbon: to regain its competitiveness through massive investment, particularly in the knowledge economy. It would not be difficult to come up with a financial institution, whether existing or to be established, to coordinate the scheme between the partners involved.

Over the years, the sheer size of the State’s borrowing needs has had a ‘crowding-out effect’ on companies competing on the financial markets. This effect would begin to reverse. Of course, at the height of the crisis, the banks and the car industry were more than happy to have the sudden shortfall in their own credit replaced by public money. However, once the crisis has passed, we must rebuild our economy on sound principles: this means disengaging the State once it has finished providing emergency help, reducing the public deficit and giving priority to financing the creation of wealth by encouraging European investors to invest in industry and research in order to create new jobs in Europe.

Alain Lamassoure, 7 July 2009