A finance student from Coventry sent me Paul Krugman post from 1997, which has some interesting things to say about today.
Fifteen years ago, just after François Mitterrand became president of France, I attended my first conference in Paris. . . . The only thing I do remember is a conversation over dinner (canard aux olives) with an adviser to the new government, who explained its plan to stimulate the economy with public spending while raising wages and maintaining a strong franc.
To the Americans present this program sounded a bit, well, inconsistent. Wouldn't it, we asked him, be a recipe for a balance of payments crisis (which duly materialized a few months later)? "That's the trouble with you Anglo-Saxon economists--you're too wrapped up in your theories. You need to adopt a historical point of view." Some of us did, in fact, know a little history. Wasn't the plan eerily reminiscent of the failed program of Leon Blum's 1936 government? "Oh no, what we are doing is completely unprecedented."
Something similar happened to the Hollande government, which is not that unlike the earlier governments headed by Blum and Mitterrand. All three governments were led by the Socialist party.
Krugman then discusses France's supply-side problems:
To an Anglo-Saxon economist, France's current problems do not seem particularly mysterious. Jobs in France are like apartments in New York City: Those who provide them are subject to detailed regulation by a government that is very solicitous of their occupants. A French employer must pay his workers well and provide generous benefits, and it is almost as hard to fire those workers as it is to evict a New York tenant. New York's pro-tenant policies have produced very good deals for some people, but they have also made it very hard for newcomers to find a place to live. France's policies have produced nice work if you can get it. But many people, especially the young, can't get it. And, given the generosity of unemployment benefits, many don't even try.
These supply-side problems largely explain why France's unemployment rate is roughly twice as high as in Germany. (Germany reports 2 rates, for reasons I'll never understand.)
Here's the conclusion, written a few years before the euro was created:
But let us not blame French politicians. Their inanities only reflect the broader tone of economic debate in a nation prepared to blame its problems on everything but the obvious causes. France, say its best-selling authors and most popular talking heads, is the victim of globalization--although adroit use of red tape has held imports from low-wage countries to a level far below that in the United States (or Britain, where the unemployment rate is now only half that of France). France, they say, is the victim of savage, unrestrained capitalism--although it has the largest government and the smallest private sector of any large advanced country. France, they say, is the victim of currency speculators, whose ravages President Chirac once likened to those of AIDS.
The refusal of the French elite to face up to what looks like reality to the rest of us may doom the very European dreams that have sustained the nation's illusions. After this last election it is clear that the French will not be willing to submit to serious fiscal discipline. Will the Germans still be willing to give up their beloved deutsche mark in favor of a currency partly managed by France? It is equally clear that France will not give up its taste for regulation--indeed, it will surely try to impose that taste on its more market-oriented neighbors, especially Britain. That will give those neighbors--yes, even Tony Blair--plenty of reason to hesitate before forming a closer European Union.
But if it turns out that Chirac's political debacle is the beginning of a much larger disaster--the collapse of the whole vision of European glory that has obsessed France for so long--we can be sure of one thing: The French will blame it all on someone else.
The eurozone had two problems, a severe mismatch in the supply-side of the various eurozone economies, and a shortfall in total aggregate spending. The combination was disastrous, both a deep recession and an uneven recession---creating internal conflict. Interestingly, Krugman doesn't anticipate the overall shortfall in AD (nor did I), but rather the one-size-fits-all problem.
Krugman was skeptical about the euro project, but didn't anticipate disaster:
Now a unified European market is a pretty good idea. There is even a reasonable case for unifying Europe's currencies--although there is also a good case for doing no such thing.
That was also my view. We both saw the one-size-fits-all problem, due to bad supply-side policies in the more socialist parts of Europe, but neither of us anticipated that the ECB would be so contractionary.
It's too bad that Krugman no longer does this sort of blogging. It's kind of fun to go back and read posts from a time when "socialism" was still a dirty word in America, not a policy that most Democrats have a favorable view of.