French knee-jerk reactions, Presidential ADHD and Regulation of the Economy

The euphoria over the European consensus on the rescue plan has not even faded and already the usual national knee-jerk reactions are coming into play again. As usual, French president Sarkozy has taken this the farthest. Having rescued the financial sector, he now wants to rescue the rest of the economy, and French industry in particular, from the many-headed market monster. Sarkozy is frequently hyperactive but this looks more like a president who has forgotten to take his ADHD medication. Where it previously looked like too little too late, this could be a case of too much too soon.

Although neither economists nor politicians know the extent yet, it is clear that the financial crisis has and will have an effect on the real economy. However, this does not yet warrant fierce intervention by governments.

In the first place, government support weakens the incentives for businesses to adapt and innovate. Governments, and in particular the French government, don’t have a good track record of supporting businesses. It is an easy populist solution to protect businesses against competition, but it would kill a competitive economy in the long term. The United States are overstepping the mark as well. Support regulations for industry were sneaked into their $700 billion support plan in order to get it passed by Congress. Wrong!

Secondly, we have the problem of arbitrariness. Which sector should be supported and which sector not? Not even France will be able to support all sectors. You would think that we had abandoned that ‘communist’ experiment a long time ago.

Thirdly, there is the danger that bad behaviour is being rewarded. Car manufacturers have lodged a support request for €40 billion under the pretext of developing a green or greener) car and a scrap programme for old cars. The car manufacturers in their boardrooms probably thought that, because bankers have been rewarded for their perverse behaviour, politicians wouldn’t be able to resist rewarding the deliberate lack of innovation in the car manufacturing sector either. Hopefully our politicians have enough backbone to accept this kind of behaviour only once.

In the fourth place, while Sarkozy may have enough time and energy to personally manage large parts of the economy, it is doubtful that those competences can be found among the president’s policymakers.

At this moment in time the most obvious instrument to stabilize the real economy is to support the extension of credit by the European Central Bank – via regular banks - to the real sector. Further intervention by way of taking share interests or subsidizing sectors would seem to be a waste of government money – read taxpayers’ money.