France downgrade changes nothing

The sun still rose in Paris on Saturday after Standard and Poor's trimmed France’s credit rating a notch.

The hybrid supercar in Peugeot’s Champs-Elysee’s showroom still pulled admiring or curious punters. The vast shoe department that is the basement of Galeries Lafayette remained a seething mass of women seeking solde footwear. The tourists kept coming, struggling with their luggage and sense of direction off the bus from Charles de Gaulle airport.

The downgrade changed nothing. A little Gallic pride may have been dented, just as America was momentarily miffed and feigned disbelief over a similar downgrade, but it’s a passing sensation for most. (Queensland having a credit rating one rung below New South Wales matters to no-one outside arcane bond markets.)

As usual, the ratings agency just confirmed what everyone should have already known. The momentary headlines, like those for the US, provide an excuse for market movements, but go nowhere.

France and the rest of the downgrade brigade remain a long way from getting their fiscal houses in order, never mind the contradiction between the need for growth and prescribed austerity programs. There’s no news in that.

The weird thing is that the solution to that contradiction – changes to fundamental  “entitlements” with long-term implications rather than concentrating on instant austerity – doesn’t seem to attract much attention while a credit rating agency status obviously does.

The six-week annual holiday, the other holidays, the closing for lunch, the restricted shopping hours that make Western Australia look liberal, the extensive bureaucracy (it is a French word) with its generous pensions and the more abstract question of the mood of French industrial relations all roll on regardless. And the Greens have a policy going into this year’s election of reducing the working week.

Dealing with reality

But this isn’t about picking on the French. The above are merely symbolic of the problems facing governments that have allowed entitlements to outstrip income. The summary of Hungary’s slide into crisis – growth not being nearly strong enough to permit the combination of lower taxes and a welfare state – has a warning for all.

There is nothing wrong with having a welfare state (check Scandinavia) as long as you’re prepared to pay for it, just as there’s nothing wrong with having a military establishment that’s a multiple of anyone else’s, on the same basis. Stating the obvious, generous welfare schemes and aircraft carriers can’t be paid for indefinitely with debt. That’s what Standard and Poors has just stated.

The European argy-bargy over greater fiscal union and discipline is only the starting point of dealing with that reality. Political paralysis is preventing the US doing more than acknowledging that Washington has a problem and Japan doesn’t seem to have even got that far yet.

What’s awaiting them all is a hyper-competitive world where no country is simply entitled to be rich. Beyond the current debt crisis, demographics and the rise of the emerging nations mean nations that took growth and greater wealth for granted will have to very seriously cut their reduced cloth to fit.

For those at the extreme of fraud and self-delusion - Greece – the restructuring will be very painful. Slipping back into developing world status, but without the developing part, will strain Greek society.

For others, with the right policies, the discomfort may well be temporary, but no-one gives up their “hard-won rights” or simple political bribes easily.

Study Australia

If pride allowed them, Europe and the US could do very well to study Australia if they want to limit the pain of restructuring. Our current good fortune is not just about China’s hunger for commodities, but also a rather admirable balancing act in targeting social welfare spending.

An unsung Australian success is our ability to deliver a relatively high level of social safety (among the top half dozen or so OECD countries) while also  being a relatively low-tax country (in the bottom third or half of the OECD, depending on how you want to measure it).

We started to lose our way in the final years of the Howard-Costello government, feeding the middle-class welfare monster with election bribes, but the current budget began to peg it back again.

(Australia needs to spend more on the twin needs of education and infrastructure and will be forced to spend more on health, but we can afford to pay for it, it’s just a matter of a government that has the discipline and political skills to explain the revenue need to the electorate.  The Old World nations can’t afford what they’re already spending and don’t have the prospects of growing their way out of it.)

Better targeting

No-one outside the Tea Party accuses the US of having an overly-generous social welfare system, but what it does have could do with better targeting. With ballooning debt measured in trillions, there’s no place for non-means-tested government assistance.

After the fiscal union issue is sorted, European nations then have the harder job of implementing the agreed discipline. Greater targeting and means testing of the welfare state could ease the pain as well as being more reasonable social policy.

And it’s not as if the citizens of the Old World are starting from that tough a position; it’s just a bit tougher than they have become used to. In an article questioning how bad things really are, New York Times writer Roger Cohen observed that we are a long way from 1930:

As the world passes that seven-billionth inhabitant mark, there are more obese than hungry people on the planet. Many of the obese are poor. Past generations could only dream of such problems. Huge numbers of people have been lifted out of poverty in the past decade. Population growth is slowing. The worst predictions of famine, pestilence and a poisoned atmosphere have proved exaggerated. China, India and Brazil are not alone in feeling the tide of history flowing their way.

So how bad are things really? That depends where you sit. The world feels particularly unpredictable because what is portrayed as a financial crisis in Frankfurt and New York is, at a deeper level, a crisis of transition. Confidence has drained out of the part of the world that is used to running the world while the ever richer upstarts, anti-Western in varying degrees but unsure still what new principles to embrace, are not ready to take over. In the last century the British handover of power to the United States had the seamless quality of a transaction between cousins. America and China are tied at the hip and have learned how to conduct business. But they remain cultural rivals.

In that broader scheme of things, the latest downgrades are footnotes, but nonetheless important. Just as Cohen found the conspicuous wealth of Italy confounding as it screams crisis, our world moves on.
And there is hope. After the initial protests, the staggered introduction of an older retirement age is no longer an issue.

Michael Pascoe is a BusinessDay contributing editor – and enjoying a strong Aussie in Europe.