Effects of the US Economic Meltdown on France - Case Study Example

Effects of US economic meltdown on France The economic meltdown in the United s is affecting the economics of the other countries. No country can remain unaffected with respect to any macro level change in other country. The almost unprecedented economic meltdown in the world’s largest economy, (the US economy,) is bound to have multi country impact in a globalized world. The great depression of the early thirty was also one of the biggest challenges to France and the world as a whole. This crisis was a result of policy failure. Government failure to regulate the economy especially the interest rate creates the main problems. Bank failures, reduction in total production, unemployment, and overall poverty was the basic characteristics. The impact of this great depression was different in different countries. Most of the French invested in gold in that time. Less exposure to stock market gave France the opportunity of less exposure to stock market related risk. Many French companies were locally funded. This make their performance less volatile than those of the US companies.Althoufgh the relative intricacy varied, the great depression brought shock to French economy. http://jch.sagepub.com/cgi/pdf_extract/4/4/21 Present financial crisis has its source in the United States. The amazing similarity between these two depressions is the failure of regulation. Either the regulation was absent, or it was not strong enough to protect its objectives from the possible misuse. The importance of regulation is the message of this financial crisis. http://books.google.co.in/books?id=2XHfgEOhP3wC&printsec=frontcover&dq=crisis+in+france&client=firefox-a#PPA169,M1 The root of US financial crisis lies in its highly non regulated banking and financial market. The problem started with un controlled sanction of loans, especially mortgage loans. Banks and other lending bodies were not careful enough to check the repayment capacity of the borrower. Banker and other lenders were taking the undue advantage of lax regulatory system. They were misusing it to full fill their non feasible credit business expansion plan. When the creditors were unable to repay the amount of the debt were increasing at an alarming rate. The complex structure of debt instruments made it difficult to understand. The common people either couldn’t anticipate or were misguided about the debt instruments. Very long ten sure of this type of financial instruments is one of the biggest risks involved in it. In case of non payment, the future installment amounts get increased by considerable amount. This reduces the probability of future repayment. Accumulation of loan amount first makes the client bankrupt. The mass number of such incidence in the society creates the possibility of finding potential buyers of the property. The banks and other lending bodies could not liquidate the amount. Accumulation of bad debts reflected in the balance sheets of the firms. Firms’ face insurmountable problem to manage fund to keep alive its operation. Firms face bankruptcy threat. This is the simplest possible way to see the circular flow of crisis. As the business houses face extreme trouble to keep them selves float, labors become the victims. Companies start reducing man power. The rate of unemployment gets increased. Increase level of unemployment makes it more difficult for the people to pay back their loan. This affects the credit problem in a multiplicative way. This extreme level of credit tap is normally known as credit crunch. As the people start losing jobs, aggregate demand falls. Produces anticipates low demand hence they also reduce production this creates further reduction in job. Already existing inventory shows lesser rate of use. The holding cost of this increases production cost. Companies try to offer products at somewhat lower cost. This affects profit margin. Altogether there is a chain reaction of reduction in the rate of economic activities. This way starting from humble mortgage crisis this problem appears as a gigantic national level financial problem. http://veterans.house.gov/hearings/hearing.aspx?NewsID=198 In a global economy, no country can remain economically unaffected to any large scale economic change in any other country. Since the demand in the US market falls, the country will reduce its import amount. US being the world’s largest economy, this reduction will have high impact on other countries. Foreign institutional investors will no longer be interested to keep their money in some non performing market. Their departure will affect public sentiment. There will be a lack of faith in equity investment. So there will be overall economic slowdown in these countries. The degree of this impact will depend on the degree of openness of the economy. France is one of the European countries that get affected in the financial crisis of the United States. The structure of French economy is quite different from that of the United States. French mass welfare system is a characterized by high spending on mass welfare. During the first half of this decade, the picture of social agitation at various states of France was common. The basic feature of this social demand was the consolidation of a number of social welfare activities. The basic demands were higher wages, stopping of proposed civil service reforms, education sector reforms, and partial privatization of a large number of public enterprises and against the proposed reduction on social spending. And pension reform. The concept of French welfare state and politics are different from those of the United States and United Kingdom. It is a big challenge to the French internal policy makers to maintain the welfare spending in the time of global financial meltdown. Some left inclined policy makers are apprehensive about the freedom of the states to initiate and maintain social spending staying with in the frame work of economic open ness. Reduction in unemployment and poverty are not impossible even in an open economic structure. In order to ensure this a properly adjusted policy is required. Reconfiguration of its domestic policy should be within the framework of globalization. The French way to tackle the internal problems by blaming the globalization is not the right way. Although the basic image of France is cited as a welfare state, yet there exist huge social, economic and other inequalities in the country. This is the example of a failure of French internal policy. Economists and others are critical over the characteristic of French policy. It is designed to protect the interests of the upper income group at the cost of the lower income group. This creates huge polarization in society. It has been described as ‘welfare states without work’ by the leading expert Anderson. The resent approach demands a flexible opinion on economic thoughts. Economic change nay not always causes inequality. A midway between the American policy of protecting the interests of the super rich and a European way to see the interests of the non productive middle aged people can be effective. Unemployment is the biggest social problem.. It is the seed of social inequality. Social spending should remain high. This spending should be directed to reduce the social inequality. If it is not able to reduce social inequality, the social cost will be very high. This spending will be directed in such a way that it will able to address the problems of the future poor. Future poor indicates a ‘set’ of people like retired people from unorganized sector, single parents, who are no in a position to support themselves. The existing French policy is directed to see the interests of the yesterday’s poor .The social policy need regular supervision to ensure it is well directed towards its actual objectives. French politicians must try to reform the age old legal barriers to do this. http://books.google.co.in/books?id=2XHfgEOhP3wC&printsec=frontcover&dq=crisis+in+france&client=firefox-a#PPA169,M1 There is intelleclectual debate on the actually beneficial social policy. Many French social activists think that the present poor socio economic situation is an ‘imported’ problem. It has been imported from the United States. Actually the problem is enrooted in French social, economic, Political and legal system. So the extremely left inclined concept to ward off globalization is not a practical solution. France has the height unemployment rate and lowest record of creating new jobs among the comparable countries.(western Europeans and north American nations ).The same country has the very high level of social spending, strong labor laws and decent increase in pension .Government spending increases from 46 percent of gross domestic product in 1980 to 54% of it in 1998. The level of poverty, social inequality and unemployment increases during this period. (1.50million to 3.55 million) Youth unemployment rate was very high (30 %) by 2000 youth unemployment rate was even gone up to 75 percentage. In a country of 60 million people, 4.5 million people were living as poor and another 5 million were very close to the poverty line. So one in every six French persons were almost poor. So there was distributional problem in society. http://books.google.co.in/books?id=2XHfgEOhP3wC&printsec=frontcover&dq=crisis+in+france&client=firefox-a#PPA169,M1 Since 2005 to 2008 the inflation rate has fallen from 2.3% to 1.5 %. This low rate of inflation and its gradual decrease shows that the economy is moving towards recession. http://www.indexmundi.com/france/inflation_rate_(consumer_prices).html According to Philips curve, unemployment and inflation are inversely related. The very high rate of unemployment (about 30%) confirms the fact. The simple explanation of Philips curve: in time of recession aggregate demand falls. So the requirement of manpower falls. This reduces the cost of production. This reduces the price of the product. So inflation falls. http://www.econ.iastate.edu/classes/econ102/bishnu/short_note.pdf An increase in government spending alone cannot address the social issues properly. Just like, tax cut along can boost the economy is a wrong concept, increase in government spending without any other clause cannot solve economic problem. The existence of the problem in French society is an internal problem. This has resistance with in the country. A large number of people are getting access to security to their jobs, medication and other benefits. They create some resistance in this process of change. Despite the resistance to change, French private sector is performing well. This is due to some change in the degree of state control in private sectors Private sector forms the tax base of the country’s tax base. The famous concept of welfare state gets financed by this system. It is important to note that total government debt that the French government has accumulated in the last seven years is equivalent to the total government debt of Canada in the past one thirty years. It shows the impossibility of long run government spending without rejunivating the private sector. The present president of the country has formulated some reformed packaged for the affected economy. The ‘bundle’ includes revitalization package for the industries, possible reduction in social spending, and possible cuts in number of jobs in public sectors. There is tremendous protest from the employees’ side against these steps. The basic demands of the labors are as follows: increase the burden of tax on the rich, say no to possible reduction in number of jobs in the public sectors. Increase the minimum wage rate. http://www.globalcrisisnews.com/europe/french-workers-strike-over-economic-crisis/id=660/ The decision of the French president has many negative sides. It has some positive sides also. Tax must be designed in such a manner that it will increase the flow of income from the rich to the poor. This will increase the rate of equitable distribution of wealth in the society. The well known concept of French welfare state is based on total social inclusion. Social inclusion is not possible without imposing high tax on the rich. High tax after a certain level will have discouraging effect on private investment in the economy. Avery high rate of taxation will reduce the profit after tax substantially. The investors will not find it lucrative enough to put money here. Since the role of private sector is getting more and more importance in the globalized world, it is not always possible to impose a very high tax. The minimum wage in France is already very high. It is basically one of the highest in the world (considering the west European and north American countries) although the president has considered a monthly hick of two hundred euro, yet it is always not possible to address the demand in a cent percent manner. The pressure of wages and pensions are already heavy enough to the government. There has been an increase in wages of 140 percent since 1974(page 162 163) but pension increases by 260 percent. As a result cost of business increased by 25 percent. This reduced the employment level. So considering the associated cost, a reform process is a need of an hour. http://books.google.co.in/books?id=2XHfgEOhP3wC&printsec=frontcover&dq=crisis+in+france&client=firefox-a#PPA169,M1 French labor laws are among the most labor sensitive laws in the world. This has both positive and negative aspects. It gives labors the protection against sudden retrenchment or any other type of hostility from the business promoters. Business promoters have to bear relatively high labor cost. In case of government, the associated labor cost including pension and other benefits affects the profitability of the organization. The time has come to make the public sector companies a bit lean. So the decision to reduce the number of employees in the public sector has some merit. Unemployment problem is the most important problem in France. If the private sector is capable of generating new employments, it is worth while to promote the private sector. If the private sector is not able to generate the requisite number of jobs in the economy, it will not be prudent to cut jobs in the public sector. The government has already announced financial support to the troubled organization to bail out of the financial crisis. The time has come to see the productivity of the government support. http://edition.cnn.com/2009/BUSINESS/03/19/france.strikes/index.html?eref=edition_business The problem in the French economy is being cited as the United States generated global crisis. This is true that the centre of the problem lies in extremely unregulated US financial system. Absence of regulations and lack of implimentatation of the existing rules in banking sector risk management are the main reasons behind the problem. The French president’s reaction regarding the essential introduction of regulations in the domain of international finance is rational. His reaction is sometime seemed to be opportunistic in nature. Every country in the world experiences the requirement of an international regulator for inter country financial operations by the institutional investors. The French presidents ‘threat’ to walk out from the international summit on economic reconstruction can be seen as an attempt to shift the focus of the agitating public. Projecting the entire financial crisis of France as a result of international deregulation of financial market may be politically beneficial in short run but it will not address the problem properly. The fundamental problem in French economy lies in its unsuccessful practice of social welfare. The social welfare system couldn’t solve the basic macro economic problems like reduction of unemployment, reduction in extreme level of difference in income. The program also fails to address the problem of social exclusion. The gender and ethnic inequality in time of accessing the social security services are very common. All these are the result of a non equitable distribution of public spending. It is not the fact that the French government is not spending for its people-but it is unable to reach out to those who are extremely in need of these services. Providing subsidy to the already financially sound section of the population at the indirect cost of the needy, government has already increased social polarization. http://books.google.co.in/books?id=2XHfgEOhP3wC&printsec=frontcover&dq=crisis+in+france&client=firefox-a#PPA169,M1 Financial reforms in the way of curtailing benefits of the existing rich for the betterment of the actually excluded can solve the problem. The present way to promote France as an invertor’s paradise at the paid tax of the common people is also not beyond criticism. Read More