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Maison Malaise

Pinchas-LandauI mentioned last week that most people in the world, and virtually everyone in Europe, is far more focused on and concerned about the crisis between ‘the West’ –  meaning the US and EU – and Russia over the shooting down of the Malaysian airliner, than they are about the fighting in Gaza. You wouldn’t know that from the Israeli media, and indeed most Israelis, who are understandably riveted to reports in the local media, do not know that. But not only is that the case, it may even be objectively justified. After all, the Financial Times reported a few days ago that a senior Russian official, close to Putin, said that the court decision requiring Russia to pay 50 billion dollars in compensation for its effective seizure of Yukos, formerly one of the country’s biggest corporations, was not a matter of concern, because “Europe is heading into a war”. Even it wasn’t August ’14, Europeans would have cause for concern…

The gathering trade war, fought via sanctions, fines and the freezing out of companies from each others’ economies, is far preferable to a real war. But it is bad news for a world economy which is being propped up by massive doses of monetary heroin  and, in Europe itself, was struggling to achieve any meaningful degree of recovery even before the crisis with Russia went from worse to even worse.

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Yet within Europe there is one country that stands out as being in a class of its own for economic weakness, and that is France. Both Spain and Italy have succeeded in making serious reforms and have been rewarded by a return to some measure of economic growth. It may be argued thast this is too little and too late, or that the reforms still do not address the underlying structural failures. But no-one can say that they are not at least in the right direction and, more importantly, they demonstrate political determination.

In France, none of this is the case. The measures enacted by the Hollande government(s) – he has already changed premiers during his presidency – have been dismissed as weak even when they were in the right direction, but unfortunately many of them were not even that. An outstanding example is the housing sector, which is now described as being “in total meltdown”.

This quote is from a Bloomberg article discussing the situation, and comes from Dominique Barbet. Not only is M Barbet a professional economist at BNP, the country’s largest bank, and hence not the kind of person to indulge in wild hyperbole, he is also a very sensible, level-headed, objective analyst. I happen to know that, because I  was the beneficiary of an intensive, one-on-one session with him last year in his office, when he gave me a review of the state of the French economy and dissected in detail the initial measures that Hollande and co. had taken to address the country’s economic malaise.

Since then it’s been downhill all the way – and that is hardly surprising, given the kind of policy moves that have been made. The immediate focus of the current hullabaloo is the latest data from the construction sector, which showed that housing starts fell 19% in the second quarter of 2014, compared to a year earlier, whilst new permits for housing, which are the best gauge of future construction, fell 13%.

Bloomberg explains that “the rout stems from a law this year that seeks to make housing more affordable by capping rents in expensive neighborhoods. To protect home buyers, the law also boosted the number of documents that must be provided by sellers, leading to a decline in home sales and longer transaction times. ”  In other words, intervention, bureaucracy and a determination to fight market forces, rather than channel them – all the hallmarks of the French economy, and the underlying reason why it is in fundamentally worse shape than even its European peers. As Barbet told Bloomberg, . “It’s difficult to see how the new housing law is not to blame.”

Bloomberg further notes that the housing slump is being exacerbated by record housing prices in Paris  and record unemployment in the French economy. That sounds like an impossible contradiction, but in fact it is the norm in the Western capitals. Although in Britain and the US unemployment is going down, prices in London and New York have gone through the roof even of Manhattan-style  skyscrapers – thanks to rich foreign buyers pouring their (often ill-gotten) wealth into the swankiest sections of the capital cities in supposedly reliable countries. Ironically, the sanctions against Putin’s cronies have already hit London house prices and may perhaps help the situation in Paris, too, although that was hardly what their author’s had in mind.

The real problem, beyond the dogmatic belief in the efficacy of bureaucratic intervention as a method of curbing market failures, is that even in countries where employment is rising, real wages are not. Young people, in particular, are unable to get a foot on ‘the housing ladder’, because prices are too high and they cannot afford to take large enough mortgages. In France, the government has succeeded in adding a further element to this poisonous brew, by creating a sharp slump in construction and thereby reducing the supply of new houses.



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