French Car Wreck
The latest economic data from France look bad. The strategy of keeping official growth forecasts high (despite the evidence) is coming under increasing pressure and there may be substantial revisions to the outlook in the pipeline. Once you break through to being more honest, there is some catching up to do.
Even more worrying are the plans apparently under preparation to support the French auto industry. Officially, these plans are still under development. But from what we can see, including unofficially this week, the next phase of assistance could well be even more problematic than the support provided to the US auto industry which, so far, only got a bridge loan.
It is quite possible that the French fiscal stimulus will morph into an industrial support package. The announcement earlier in December already included an increased subsidy for buying a new car.
Why would more subsidies for the French car industry be bad? The bigger global danger lurking is tit-for-tat protectionism, and this is unlikely to start with overt tariff increases these days. Rather, countries will look for new pseudo-bailout ways to give their firms a leg up on the competition.
The Chinese, by the way, are keeping careful score, probably with an eye to their own quasi-protectionism down the road (or already, in terms of nudging the renminbi to depreciate). It's starting to look a lot like the kind of uncoordinated policy response that can further destabilize the situation.
The G-20 had sensible anti-protectionist language in its November communique, but this was rather high level. Clarification from the French/British leadership of the G-20 would be most helpful right around now, particularly if supported by transparent statements regarding what kind of auto industry support should or should not be regarded as a step towards protectionism. No doubt the Germans and Japanese would also like some input into this formulation, and the great advantage of the G-20 is that the Brazilians, Koreans, Indians and others can also be brought on board directly.
How about starting with a systematic official global tracking of proto-protectionist measures, in whatever form they appear? The G-20 website would be a good place to publish this kind of ruthless truth-telling.
This article was also posted on Simon Johnson's blog, Baseline Scenario.