France: Public Investment to change Business Cycle Profile? The government proposal

Last Sunday evening Jean Marc Ayrault, the French Prime Minister, was on television to announce that his government will put investment at the first rank of its short run targets in order to improve the French business cycle profile.
This announcement starts from the very simple observation that productive investment has had for a very weak profile for a long time period (I mentioned this point here). Looking at business cycle determinants suggest that its profile is conditioned by investment and not by consumption. Consumer expenditures have a too smooth profile. This is not the case for investment. So boosting it is the best way in the short run to improve potential growth, economic activity and employment.

What the prime minister has proposed is the following: French State will sell part of its stake in public companies (we do not have companies’ name for the moment) and use the proceeds to increase public investment. It will only be for investment not for other kind of expenditures.

The aim of this project is to create an impulse on private investment with public investment being a catalyst. One is the impulse and the other will extend it through time.
The idea with public investment is to create an upside break as nothing seems to be able to change French economic momentum. French public investment must only be the starting point of this break.
The government knows that without relay from the private sector this project will not be able to change the situation.

The kind of investment will be important. Jean Marc Ayrault talked of very high speed internet network for all the French territory. Such a project could have a large part of high technology and could be done by local companies. This can be very helpful at a local scale while having very positive externalities for the whole economy.

Nevertheless this project needs to have a relay from the private sector and not only by companies that are directly involved in the public investment scheme. This means that the economic conditions have to change. Demand has to be stronger in order to change companies’ expectations and forecasts. The fiscal side has probably to be more business friendly to create incentives to invest in France. French new laws on the labor market and the recent meeting between the French president and companies on taxes could be a good start.

French economic policy is deeply changing by putting investment first. The government wants to be the catalyst to change private investment and at the end business cycle profile. This can be a game changer in France. We can imagine a more cooperative behavior between the government and companies. It’s the only way to catch up growth. If this new behavior is real, then the prospects for the French economy could improve deeply.

One thought on “France: Public Investment to change Business Cycle Profile? The government proposal

  1. Pingback: France: the disturbing path of the Industrial Production Index | Le Blog de Philippe Waechter

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