Tag: Confidence and fiscal consolidation

Original post (24/4/12)
The result of the first round of the French presidential elections on 22 April make it likely that François Hollande will be the new president.

M. Hollande can be described as an austerity sceptic. In other words, he questions the wisdom of trying to meet the target agreed by eurozone countries of reducing public-sector deficits to no more than 3% of GDP.

If elected, M. Hollande promises to adopt a more Keynesian stance of stimulating demand in order to prevent a slide into recession. This would mean a reversal of cuts and a growth, at least temporarily, of the public-sector deficit.

Currently France’s deficit is much higher than the 3% target. In 2010 it was 7.1%; in 2011 it had fallen somewhat to 5.2%. But it is set to rise in 2012, thanks to the slowing economy in France and most of the rest of Europe.

And it is not just in France that ‘austerity sceptics’ are on the ascendant. In the Netherlands the centre right government of Mark Rutte fell. He was unable to get his coalition partners to agree to sufficient cuts to achieve the 3% target. And yet, the Netherland’s deficit is considerably lower than most eurozone countries’. In 2012 it is projected to be just 4.6% of GDP.

So if doubts about the 3% target could lead to a change in policy in the Netherlands and France, what hope is there that the targets could be adhered to by countries with much larger deficits and where the pain of the cuts is already causing political turmoil?

The growth in austerity scepticism has spooked the markets. The day following M. Hollande’s first round victory and the fall of Mark Rutte’s government, stock markets around Europe plummeted and bond prices rose. The higher bond prices will make it even harder for governments to refinance maturing government debt. Take the case of France. As Robert Peston remarks in his article below:

According to IMF figures, 59% of France’s government debt is held overseas – which means that well over half of all lending to the French state is not motivated by sentimentality or patriotism in any way.

To put that figure into context, just 24.8% of UK general government debt is provided by foreigners.

Perhaps more relevantly, the French government has to borrow a colossal sum equivalent to 18.2% of GDP this year and 19.5% next year to finance debt that is maturing and the current deficit.

So what are the implications of the rise in austerity scepticism? Will it make deficits harder to finance? Will a collapse of confidence push the eurozone into a deep recession. Might the eurozone break apart? Or will a dose of Keynesian policies turn the tide and allow growth to resume, making it easier to service government debts? The following articles explore the issues?

Update (7/5/12)
François Hollande was indeed elected president on 6 May. The question now is to what extent he will be able to enact measures to simulate the economy. In his campaign he had talked about renegotiating the European treaty on budget discipline. Angela Merkel, responding to M. Hollande’s victory, said that the European fiscal treaty had been agreed and could not be renegotiated. Nevertheless, she said she was happy to consider new growth strategies that did not involve increased budget deficits.

François Hollande’s potential spending spree in France has caused concern in austerity Europe The Telegraph, Bruno Waterfield (23/4/12)
European turmoil, American collateral Guardian, Robin Wells (24/4/12)
Political risk returns to eurozone debt crisis Financial Times, Richard Milne (23/4/12)
The rise of Europe’s austerity foes Business Spectator, Karen Maley (23/3/12)
Europe: A crisis of the centre BBC News, Paul Mason (24/4/12)
Is Hollande enemy or prisoner of finance? BBC News, Robert Peston (23/4/12)
President Hollande and the IMF BBC News, Stephanie Flanders (23/4/12)
French Bond Yields Test Hollande’s Economic Fealty Bloomberg, Mark Deen and Anchalee Worrachate (24/4/12)
Dutch and French politics bring us back to reality BusinessDay (South Africa), Ron Derby (24/4/12)
Crisis topples governments like dominos Deutsche Welle, Bernd Riegert (24/4/12)
Eurozone leaders push for growth BBC News (25/4/12)

Additonal articles (after 6 May)
Francois Hollande to set France on new course after win BBC News (7/5/12)
Europe elections: German Chancellor Angela Merkel welcomes Francois Hollande but warns Greece The Telegraph, 7/5/12)
A Merkel-Hollande bust-up? Less likely than you might think Guardian, Philip Oltermann (7/5/12)
Merkel Rejects Stimulus in Challenge to Hollande BloombergBusinessweek, Patrick Donahue and Tony Czuczka (7/5/12)
François Hollande’s chemistry with Angela Merkel crucial for Europe Guardian, Ian Traynor (7/5/12)
Q&A: End of austerity? BBC News (7/5/12)
Austerity and the people’s verdict Guardian letters, Shanti Chakravarty and others (8/5/12)
Europe: The big debate BBC News, Stephanie Flanders (11/5/12)

European Economy: Economic data Economic and Financial Affairs, European Commission
Eurozone Statistics ECB
French Economic Statistics INSEE, National Institute of Statistics and Economic Studies
Netherlands Statistics CBS, Statistics Netherlands


  1. Why do investors worry about the pursuit of Keynesian expansionary fiscal policies? Are their fears justified?
  2. How important is it for countries, such as the Netherlands, to retain their AAA credit rating?
  3. What determines bond yields?
  4. Do a search to find the policies advocated by M. Hollande. Assess the likely economic impact of these policies.
  5. What conditions are necessary for the pursuit of a tough austerity line to achieve economic growth in (a) the short term of 12 to 18 months; (b) the longer term of several years?
  6. Is an increased use of public-private partnerships a solution to finding a way of delivering greater infrastructure expenditure without increasing the short-term deficit?

The sun may have been shining of late across the UK, but there are increasing signs that economic sentiment is deteriorating, more especially amongst consumers. The EU’s economic sentiment index for the UK fell for the first time since November of last year and is now just a little below its long-run average.

The EU’s economic sentiment index is a composite indicator of confidence in that it captures confidence levels amongst both consumers and businesses. While overall sentiment actually increased in each month from December of last year through to this May, the decline in consumer confidence in the UK is now well established having fallen each month since March.

We might expect the falls in consumer confidence to be reflecting the prevailing economic environment and, in particular, the increasing number of people unemployed. However, since the sentiment survey contains forward-looking questions too, it may be that declining consumer sentiment reflects concerns amongst households about the impact of fiscal consolidation measures. These consumer expectations could be important in affecting consumer behaviour today. It could be very important to track consumer confidence in the coming months, especially in light of the measures announced in the Budget of 22 June (which occurred after June’s polling of consumers) and subsequent announcements too.

Interestingly, declining levels of consumer confidence in the UK had until June been offset by rising confidence amongst businesses. However, confidence across most sectors of industry deteriorated in June. In particular, confidence amongst manufacturers fell back very sharply. Bucking the trend were businesses in the service sector who reported feeling more confident than at any time since March 2008. However, given waning sentiment elsewhere, one would expect this to be relatively short-lived.

The profile of the average economic sentiment indicator across all 27 member states of the EU is broadly similar to that for the UK. It exhibits a sharp and continuous rise from the historic lows of the indicator recorded in March 2009, but fell back, although very slightly, in June. The improvement in sentiment amongst business has been especially marked. Sentiment too had been improving amongst consumers, but recent evidence points to consumer confidence easing, although not quite to the extent seen here in the UK.

There are, of course, some notable national trends in sentiment across EU countries. It will come as little surprise to know that in Greece the economic sentiment indicator has, in recent months, been at historic lows. If you are looking for countries where sentiment is above average, then perhaps try, amongst others, Austria, Denmark, Finland and Germany!


Euro economic sentiment near-static RTE (29/6/10)
Eurozone confidence unchanged Bloomberg Business Week, Associated Press (29/6/10)
Eurozone economic sentiment picks up Financial Times, Stanley Pignal (29/6/10)
FTSE loses more than 3% as Wall Street slides on confidence data Guardian (Market Forces Blog) (29/6/10)
How long can the housing market avoid a crash? Independent, Sean O’Grady (30/6/10) (Article stresses link between confidence and the housing market)


Business and Consumer Surveys The Directorate General for Economics and Financial Affairs, European Commission
Consumer Confidence Nationwide Building Society


  1. Think about your confidence in your own financial situation. Draw up a list of those factors that might affect this confidence. How might this list change if you were thinking about the level of confidence across all consumers?
  2. Why might confidence amongst UK consumers have been falling well before that amongst businesses? Do you think such divergences can persist for any length of time?
  3. What factors do you think might be particularly important in affecting the sentiment amongst consumers and businesses in the weeks and months ahead?
  4. Imagine that you are given a choice of plotting a chart over time of the economic sentiment indicator and either the level of real GDP or the rate of growth in real GDP. Which plot would you go for and why?
  5. Perhaps the key question of all! Do you think economists can learn anything from tracking the patterns in economic sentiment?