Quote of the day

“I find economics increasingly satisfactory, and I think I am rather good at it.”– John Maynard Keynes

Friday, 6 December 2024

Have a look at the options for France:

 

For his next stunt, will Emmanuel Macron invoke emergency powers?

The impact of the French president’s dangerous pyrotechnics is making it easier for him to justify recourse to Article 16

French President Emmanuel Macron, right, and Prime Minister Michel Barnier
Macron could reasonably argue that failure to pass a budget prevents the country from fulfilling its EU treaty commitments Credit: Ludovic Marin/POOL AFP

France will have to face the discipline of the global debt markets on its own. The European Central Bank (ECB) cannot legitimately intervene to hold down French borrowing costs unless, and until, the country faces a full-blown financial crisis.

If the ECB were to abuse its legal powers to let France off the hook, it would set off a political and legal storm, and further erode German confidence in the management of the euro.

“France will have to face fiscal reality and dig itself out of the hole that it has dug itself into,” said Holger Schmieding, chief economist at Germany’s Berenberg Bank.

“Nobody on the governing council wants to get mixed up in a French problem. The ECB will intervene only if there is contagion to other countries, or if the spreads reach ludicrous levels,” he said.

That point has not been reached. There is no contagion. Risk spreads on 10-year French bonds over German Bunds have settled at around 80 basis points, and have not risen further since the collapse of the Barnier government.

The market reaction is so far surprisingly gentle, given the dangerous pyrotechnics of Emmanuel Macron over the last two and a half years – which have rendered France literally ungovernable with a fiscal deficit heading towards 7pc of GDP next year.

Some suspect that he would prefer a harsh verdict from the bond vigilantes. The worse the spread, the easier it is for him to justify recourse to Article 16 – the constitutional clause that allows him to assume emergency powers. The “Korean” solution, without the added touch of stormtroopers.

Agnès Verdier-Molinié, the director of French Institute of Public Administration and Politics (IFRAP), says the sorcerer’s apprentices who blocked the budget and defenestrated Barnier on Wednesday have set off a chain of events that they may regret. She thinks Macron will up the ante, invoking the fiscal crisis to pull the trigger on Article 16.

The powers can be invoked if there is a threat to the “execution of France’s international obligations”. Benjamin Morel, a political scientist at Paris-Panthéon, said Macron could reasonably argue that failure to pass a budget prevents the country from fulfilling its EU treaty commitments.

He told Ouest-France, the French newspaper, that France is the only country in Europe where the president can assume these pleins pouvoirs at his own discretion. “Everywhere else it is a separate body that authorises them,” he said.

Charles de Gaulle invoked Article 16 in 1961 following the Algiers putsch by retired army officers. It gave him the temporary powers of a Roman dictator, which he rolled over for almost six months, spicing it up with eyewash about a Communist “revolution from the inside”.

Activation of the clause requires both a “grave and immediate” threat, and a breakdown in the regular functioning of the state. The Constitutional Council can issue an opinion after 60 days. “It remains only an opinion. It does not oblige the president to change tack,” said Mr Morel.

Would Macron really pull such a stunt? Perhaps, if his next premier faces instant dismissal. He might calculate that his enemies could never command the two-thirds majority in both the assembly and the senate necessary to impeach him. But if he did take this fateful step, the nation would erupt. He raised the spectre of “civil war” in June. Article 16 almost invites it.

France risks slow ruin – as does Britain – but it does not face an imminent financial crisis. French spreads approached Greek levels last week but that is a nonsense story, promoted by Barnier himself in a catastrophist effort to sell his rejected budget. Greece is shielded from market forces. Most of its bonds are held by bail-out bodies.

French debt has an average maturity of 8.6 years. It takes a long time for higher borrowing costs to feed through. The growth rate of nominal GDP is still above the average interest rate. Debt dynamics have not yet succumbed to a snowball effect, though that safety margin could vanish if the eurozone core relapses into recession, which may already be happening.

Nevertheless, French yields have been higher than Spanish or Portuguese yields for months. This is an extraordinary development and a warning to the French political class that their country no longer enjoys an exorbitant privilege as co-anchor of monetary union.

The ECB cannot salve French amour propre. It was able to prop up high-debt countries during the deflation years by purchasing €5 trillions (£4.1 trillions) of bonds under the cover of quantitative easing. That is no longer impossible.

The bank has since invented an anti-spread shield (TPI) but has never dared to use it, and for good reason – it is highly contentious and a flaming violation of the no-bail clause in the Lisbon Treaty.

The ECB arrogated to itself the power to buy distressed bonds as it sees fit, but only on behalf of countries that pursue a) “sound fiscal and macroeconomic policies”; b) are not “subject to an excessive deficit procedure”; c) do not have “severe macroeconomic imbalances”; d) where the “trajectory of public debt is sustainable”; and e) where stress is “not warranted by country-specific fundamentals”.

France is in breach of every one.

Markets are betting that the ECB will find some way around this. No doubt it will, in extremis. But Isabel Schnabel, Germany’s enforcer on the governing council, has a message for them. The TPI can only be used to “tackle disorderly dynamics” and to “prevent destabilising interest rate spirals, which might otherwise drag the euro area into a severe crisis”.

Any sustained help would require a “macroeconomic adjustment programme”, which means an austerity package by the EU bail-out fund (ESM) – and probably an IMF regime, given the scale of France’s €3.3 trillion debt.

This would come with tough conditions and require a vote in the German and Dutch parliaments. There is zero possibility that Left-wing Popular Front or Marine Le Pen’s Eurosceptic nationalists would accept such terms, or any terms at all.

Macron is back at square one, but in an even weaker position, amid mounting calls for his own resignation. “No confidence, no government, no budget, no solution,” was the pithy verdict of Arnaud Marès, chief European economist at Citigroup.

The idea of a technocrat coalition is a fool’s illusion in a great political nation like France. There are only two permutations that can plausibly deliver a government. Both are explosive.

Either Macron swallows his pride, lets the Left take charge as the largest bloc, throws what remains of his inglorious party behind it in cohabitation, and accepts that much of his seven-year edifice will be torn down.

Or, he eats his rhetoric, lifts the cynical cordon sanitaire that is so corrupting French politics, accepts that Le Pen’s 11m voters are a legitimate political community, and reaches a pact with her National Rally, ministers and all.

That is to say, he must do overtly what he has been trying to do on the sly whilst hiding behind Barnier. This would lead to a general strike and mass demonstrations, but it would lance the boil.

Macron caused this crisis by systematically destroying the centre-Left and the centre-Right, aiming to construct a nouvel ordre in the centre for his own Jupiterian glorification.

He succeeded in the first part, even if in nothing else. He refused to back down when this blew up in his face in 2022, opting ever since to ram through his agenda against popular and parliamentary will by executive decree.

Nothing can be resolved until Macron either falls on his sword or learns the meaning of democracy and falls on his knees at Canossa.

Wednesday, 4 December 2024

And from earlier in the year - tackling the benefits trap:

 

Long-term sick should be forced to seek work, says Labour adviser

Alan Milburn called for fundamental reform of a ‘crazy’ benefits system, with getting people back to work the ‘only route’ to faster growth
Alan Milburn said he had identified “a group of people who are willing to work but are not being helped to do so”
Alan Milburn said he had identified “a group of people who are willing to work but are not being helped to do so”
MICHAEL BOWLES/SHUTTERSTOCK

The long-term sick must be required to look for jobs to deal with unsustainable welfare costs and reduce the country’s “toxic” reliance on immigration, a government health adviser has urged.

Alan Milburn, a former health secretary, found that seven out of ten of the economically inactive want to work but few have any help or requirement to do so, and said there should be fundamental reform of a “crazy” system.

In a report he presented alongside Liz Kendall, the work and pension secretary, he said that dealing with record numbers outside the workforce was the “only route to higher levels of economic growth”.

• Watch: Keir Starmer faces questions after Labour MP rebellion

Kendall acknowledged that dealing with long-term sickness was “central” to Sir Keir Starmer’s plan for growth and she promised fundamental overhaul of job centres and back-to-work support to deal with “spiralling” economic inactivity.

While praising Milburn’s “brilliant report”, she stopped short of backing his plan to impose conditions on sickness benefits, saying the priority was better health and employment services. “There have always been conditions to look for work and consequences if you don’t, that won’t change. But I want to see a much greater focus on that upfront help and support,” she said. “I think we’ve had too much of a focus on [clampdowns] rather than the help and support people really need to get into work.”

There are a record 2.8 million people off work because of long-term sickness, part of 9.4 million people neither in employment nor looking for a job, more than one in five of all those of working age.

With the cost of sickness benefits due to reach £64 billion a year by the end of the parliament, up by £30 billion on pre-Covid levels, Kendall said: “Spiralling economic inactivity is bad for individuals, many of whom want to work, it’s bad for employers who are desperate to recruit, and it is bad for our public finances.”

• Alan Milburn’s verdict: How to solve Britain’s “most toxic issue”

But Kendall also dismissed claims by her predecessor, Mel Stride, that labelling everyday worries as mental health problems was pushing up the benefits bill. “Divisive rhetoric about strivers versus scroungers, or claiming people just feel ‘too bluesy’ to work may have grabbed headlines, but it did absolutely nothing to actually get Britain working again,” she said.

Arguing that the “vast majority” of claimants needed help, she said that inactivity was “driven by the fact that we are an older, sicker nation”. Kendall added that “the pandemic had a real impact on the mental health of young people”, promising treatment and support earlier. Kendall concluded that her department had become too focused on overseeing benefits payments, saying: “We need fundamental reform so a department for welfare becomes a genuine Department for Work.”

Liz Kendall envisages leading a “Department for Work”
Liz Kendall envisages leading a “Department for Work”
KARL BLACK/ALAMY

She was speaking in Barnsley, where Milburn has been carrying out a review of how a former “epicentre” of unemployment had seen jobseekers replaced by the long-term sick. He said he was surprised that polling for his review found seven in ten of those classed as unable to work said they would like a job.

Yet although eight out of ten of them were claiming benefits, “only one in ten actually have any contact with employment services that could help them to work. This is what you call a catastrophic systems failure,” Milburn said.

Saying that nationwide these findings could mean an extra 4.5 million potential workers, he said: “The officially unemployed are outnumbered now six to one by people who are economically inactive, who have no engagement with job centres. This is crazy.”

He said the Conservatives had been “relying on toughening benefit rules to deal with what is largely a health-related problem”, calling for “a better balance between sticks and carrots”.

However, he acknowledged a “perversity” in the benefits system that has created incentives to be signed off sick. “If you are officially seeking work, you get help to do so, you have regular contacts and a lot of hassle, but you get lower benefits than if you’re classified as unable to work where you get no hassle and no contacts,” he said.

While stressing that some people would never be able to work, Milburn said that he had identified “a group of people who are willing to work but are not being helped to do so”.

“We’ve got to have a two-way street,” he said. “The state will provide more help, greater personalisation, better integration for example of health and employment support services. But if you’re on state benefits, and economically inactive, you have a duty to engage with those better services.”

Milburn is also advising Wes Streeting, the health and social care secretary, right, arriving for a cabinet meeting with Jonathan Reynolds, the business secretary
Milburn is also advising Wes Streeting, the health and social care secretary, right, arriving for a cabinet meeting with Jonathan Reynolds, the business secretary
CARL COURT/GETTY IMAGES

Urging Rachel Reeves, the chancellor, to find upfront cash for a “a genuine case of investing to save”, Milburn, who is advising Wes Streeting, the health secretary, also said the NHS should be required to help employment services.

Such a drive to get people back to work would also deal with the “toxic issue” of immigration and prevent a “tide of populism” seen in Europe from sweeping Britain, Milburn argues. “This is a wake-up call for the new Labour government,” he writes in The Times today, urging ministers and bosses “to wean themselves off the easy solution of importing more workers from overseas”.

Getting people back to work instead is “the biggest opportunity both to grow the British economy and deal with the most toxic issue in British politics,” he says.

In sickness and unemployment

 

Benefits beat seeking a job, minister admits

Alison McGovern says the system makes it hard for the long-term sick to find work, with the bill set to rise to £100bn by 2030
Alison McGovern said the Tories made the situation worse when they cut jobseekers’ benefits and increased long-term sick pay
Alison McGovern said the Tories made the situation worse when they cut jobseekers’ benefits and increased long-term sick pay
REX

Benefits claimants have increasingly found that they can get more money being signed off sick than looking for a job and there is “clearly a problem” with incentives in the system, the employment minister has acknowledged.

Alison McGovern said that the current system “doesn’t work for anybody” because it made it hard for the long-term sick to find work while pushing up costs for taxpayers.

McGovern said that it was “bleak” that rising numbers of young people were being signed off sick with problems such as mental health conditions. She said that the welfare system needed to change so that disabled people were helped to find work rather than being left “on the scrap heap”.

It was “obvious”, she noted, that the current system was not financially sustainable, with the cost of sickness benefits rising to £65 billion this year and projected to hit £100 billion by the end of the decade. McGovern said that the government was doing “a lot of thinking” about how to reform the welfare system, as she acknowledged that ministers had “further choices to make” as they aim to set out plans next year.

There are currently 3.3 million people claiming incapacity benefits because they are deemed too ill to work, up a million since Covid, with the figure projected to hit 4.1 million by the end of the parliament. Last week ministers set out a back-to-work plan aiming to improve help for people seeking jobs, while acknowledging that they needed to look at the welfare system.

• Young people face losing benefits if they don’t take up training

Experts have said that one reason why the numbers are rising is that those on incapacity benefits can get about £5,000 a year more than jobseekers, and with fewer conditions. Acknowledging the problem for the first time, McGovern told the Lords Economic Affairs Committee that there was “clearly a problem with the situation we’re in now with social security benefits and the changes over the past decade or so that have meant more likelihood” of people ending up sick in the long-term.

“There’s the headline rate issue and there’s also some process issues,” she said.

“The current system doesn’t work, it doesn’t work for anybody … Universal credit was supposed to be designed as a system that would strongly incentivise work and it’s turned out not to do that.”

Shaun Butcher, deputy director of disability analysis at the Department for Work and Pensions (DWP), said that it was unclear how much the gap in payment levels had worsened the problem but stressed that “those incentives are quite powerful” for people claiming benefits.

Blaming repeated Conservative crackdowns on jobseekers’ benefits for increasing the pay and conditions gap with the long-term sick, McGovern said that they had ended up “making the situation worse”.

“It’s definitely the case that the difference between being in the old JSA [Jobseeker’s Allowance] unemployed bit of the system, and the ill health, limited capacity for work-related activity group — the gap has widened,” she said.

“Various decisions that were taken throughout the period of the last decade or so have meant we’ve had this bifurcation effect between the two groups of people — out-of-work unwell, and the technically unemployed, actively seeking work — that have not helped the situation.”

She said that “a system with very hard and high walls between the two categories” did not work, adding: “We need to lower those barriers and to try to create a system that doesn’t place people in a binary category that it is unlikely that they will escape from.”

A green paper on welfare reform is due next year and McGovern promised that it would have “more to say” about how the system should change.

Reforms would aim to ensure that the long-term sick would not be scared of talking to jobcentres, as she argued that workers should have “much more access to occupational health support” at work to stop them going off sick.

She added: “I’d also like our work coaches from jobcentres to be able to be available in GPs’ offices and other places.” Saying it was “frustrating” for doctors to see patients whose real problems were about work, McGovern argued: “I would like them to be able to have a much closer relationship with us in DWP so we can try and help with the person’s broad sweep of problems.”