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Letter from France: When events move too fast for the invisible hand

Alan Kirman on climate change, inflation, French politics and the cultural heritage of the baguette.

Each year recently, I have concluded this letter with the hope that the next will be better! A brief look at what has happened this year suggests that destiny and mankind have decided otherwise. What is increasingly apparent is that the increased speed of the interactions and feedbacks in the global system leave little or no time for the putative “invisible hand” to do its job, and France, like other countries, is the victim of this evolution. The war in Ukraine came to our doorstep when we took in a Ukrainian family who have been with us since September.There are four such families in our village of 600 inhabitants.

Climate change Whatever happens in December, 2022 is headed towards being the hottest year on record in France. This might have been good news but it will also be the driest year, which has had severe consequences for food production and has provoked battles over the construction of new reservoirs, described by those opposed to them as being for “industrial farmers” who refuse to adopt more economical and ecological agricultural techniques.

 

Inflation

Inflation has increased rapidly, though it is still well below that in our European neighbours. The ECB reacted in the conventional way: Increase interest rates until inflation is crushed. As Einstein reputedly said, “Insanity is doing the same thing over and over and expecting different results”. This is particularly true when you have no idea as to what the consequences of your actions will be. Jerome Powell, the chairman of the Fed, said in September, as he “justified” increasing interest rates, “no one knows whether this process will lead to a recession or, if so, how significant that recession would be.”

Two voices in Europe were raised against this approach. Emmanuel Macron said, “I’m concerned to see lots of experts and certain European monetary policymakers explaining to us that we need to break demand in Europe to better contain inflation,” while Sanna Marin, the prime minister of Finland, said, ‘“There is something seriously wrong with the prevailing ideas of monetary policy when central banks protect their credibility by driving economies into recession.”

Inflation is a complex phenomenon and poorly portrayed through one index. Many factors are in play: Energy prices linked to then war in Ukraine, the disruption of global supply chains after Covid, and the sharp but relatively short lived rise in shipping costs. As one specialist said in January: “There are about 180 million containers worldwide, but ‘they’re in the wrong place.’ ” This misallocation attributed to the Covid pandemic rapidly became apparent in France, with some factories temporarily closed and a number of standard products disappearing from supermarket shelves.

However, the direct effects of increasing energy prices were supposed to be limited in France, since here over 70% of electricity is generated by nuclear power and only around 10% from fossil fuels. However, in 2022, due to the corrosion of cooling systems, ten of the nuclear power stations were shut down, and with the rise in energy prices elsewhere France was anticipating difficulties this winter.

The government has resorted to measures such as reducing taxes on fuel and capping energy prices in general, to soften the blow for the consumer. This is frequently condemned as inefficient by economists, but few voices have been raised to condemn their use this time. There have been strikes in various sectors, particularly in public transport, demanding more measures to offset the increase in the cost of living. Polls show that a majority are sympathetic to this fight against this cut in real wages, and a larger majority in favour of taxing windfall profits made by the fossil fuel companies during the crisis.

 

French politics

Emmanuel Macron was elected president for a second term in April. In the general election which followed, Macron’s party failed to get an overall majority and his government has resorted to what is called the 49-3 procedure. This allows the passage of legislation without a vote. Those opposed to the proposed measure can propose a vote of no confidence which must be rejected for the law to pass. The prime minister thus needs some support from deputies from other parties. Hence, a tacit coalition, with the right and even the far right, has formed and has levered the political orientation of Macron’s policies. This has resulted in announcements of tougher policies on immigration and the recent passing of a law to penalize squatters more heavily. The right in this “coalition “are now threatening to block any increase in public spending while at the same time, in true populist tradition, claiming that the government should do more to help the “man in the street”.

 

Something positive

But there is always some good news. Early in December, UNESCO recognized the baguette as part of the world’s cultural heritage.

 

A warm note

Macron has recently, together with the Minister of Finance, promoted an approach to offsetting the energy crisis by heating less. Public buildings must not heat above 19 degrees centigrade, and if every household in France reduced the average temperature by one degree, the government has predicted that this would reduce energy consumption by 7%. They also argued that people should wear warm woollen sweaters. This sudden affinity for woollen garments reminds me of an advertisement for wool that used to be seen on the London underground in the‘50s when I was a student, and I cannot resist reproducing it here:

Henry the Fifth at Agincourt, Outnumbered ten to one, we’re taught,

Licked the French with English bowmen

Woollen-clad like country yeomen.

The Frenchmen charging through the bogs

Were hampered by their iron togs,

And perished, proving once again,

That “Rien ne remplace la laine”

 

Alan Kirman

5 December 2022