{"id":197225,"date":"2018-12-22T17:37:18","date_gmt":"2018-12-22T12:07:18","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=197225"},"modified":"2018-12-26T13:55:23","modified_gmt":"2018-12-26T08:25:23","slug":"what-is-happening-in-france-a-lesson-to-learn","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/what-is-happening-in-france-a-lesson-to-learn\/","title":{"rendered":"What Is Happening In France? A Lesson To Learn!"},"content":{"rendered":"

By Hema Senanayake<\/a> –<\/strong><\/p>\n

\"\"<\/a>

Hema Senanayake<\/p><\/div>\n

In brief, France will begin to deflate debt in general through wage-increased bound \u201csubsequent\u201d moderate inflation beginning next year. Economically, this can be defined as a different kind of reflation, because previously known reflations have not been done through wage increases. During periods of economic difficulties like decreasing growth or recessions, wage increases were considered as negative, thinking such actions would discourage entrepreneurs and would slash jobs. That ideology is not true. However, since this reflation is happening by accident as a response to widespread riots, this can be more accurately defined as \u201caccidental reflation.\u201d Whatever the case, such processes deflate systemic debt in general and would ensure economic growth if the reflation is big enough.<\/p>\n

What is reflation? The easiest way to understand this concept is to look at the opposite of it which is deflation. In a situation of deflation, prices would be decreasing, and the value of existing debt would be increased. The opposite will take place during a reflation. If the reflation is designed properly in accordance with systemic behavior of the economy, the outcome is positive and if it is happened due to any other reason, unintended consequences like severe inflation might occur.<\/p>\n

Initially, it was unimaginable. But it happened in France. For several weeks from mid-November to early December of 2018, people began to protest and riot, openly clashing with police. Several people were dead, some injured and properties worth millions were damaged. People protested against the way of handling the economy by French president Emmanuel Macron. After seeing another round of violent protests on Sunday of December 09th<\/sup>, the next day President Macron has announced economic concessions addressing the nation to quell protests.<\/p>\n

President Macron\u2019s concessions included an income raise for minimum-wage workers and tax cuts for some pensioners and overtime workers from the beginning of next year. He also promised that initially the businesses would not be required to incur the cost of minimum wage increase as the cost would be born by the government. These were the main concessions. What do these concessions mean to French economy?<\/p>\n

In order to answer the above question, we need to look at the credit (debt) growth data in the economy. French economy is an economy which can be defined as an economy with a problem of significant \u201cover-indebtedness.\u201d The resultant effect of such a situation is that the issuance of credit is not sufficiently enough to have a robust economic growth and people would feel that they do not have enough money for their day to day expenses.<\/p>\n

According to data the household debt to GDP was 58.6% in the first half of 2018 and so is the second half of this year so far. This means no credit growth in household sector. This is not usual in a growing economy. However, this could be possible in a growing economy, if the non-financial private corporate sector\u2019s credit level is increasing. It means that non-financial businesses are increasing investments through which consumer income is increased ensuring higher demand for goods and services even though the consumer credit level is not increased.<\/p>\n

But unfortunately, non-financial corporate sector\u2019s credit growth too, is stagnant. According to the data compiled by the Bank of International Settlement, in France, Total Credit to Non-financial Corporations has not grown significantly or in other words credit growth to this sector is almost stagnant. This is not a good situation either. Only other option is to increase the government\u2019s deficit financing. As at now French Government\u2019s Debt to GDP is 97% which is far more than the stipulated public debt to GDP by the European Union\u2019s Economic Growth and Stability Pact.<\/p>\n

Given the above circumstances the French government could either increase taxes or \u201creflate the economic system.\u201d So far, no government has not proactively \u201creflate the economic system through wage increases\u201d by design. Therefore, French government first relied on the option of what is left, that is to increase taxes may be thinking that reduced deficit financing by increasing taxes would support growth. So, they introduced a new fuel tax which was the trigger for erupting demonstrations. Already cash-starved French people were quick to riot.<\/p>\n

After several weeks of disturbances, in order to quell the riot, French President Macron by accidentally decided to reflate the economic system by raising wages. This is more positive as it would deflate systemic debt. Therefore, this method of reflation would positively change the credit growth levels in household and non-financial corporate sector, possibly avoiding a recession. Yet, there is an obstacle for France. The reflation should be big enough to bring the necessary impact on the economy. This goal can be achieved only if the country has its own central bank. But for France there is no such independent central bank of its own but has to work with the European Central Bank. As such the best cause of action for the EU is to reflate the entire system by design.<\/p>\n","protected":false},"excerpt":{"rendered":"

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