FRANCE CHOOSES TO BEEF UP SECURITY & DEFENSE OVER BUDGET RULES

Published November 20, 2015 | By Ambrose Evans-Pritchard

France has invoked emergency powers to sweep aside EU deficit rules and retake control over its economy after the terrorist atrocities in Paris, pledging a massive in increase and security and defense spending whatever the cost.

President Francois Hollande said vital interests of the French nation are at stake and there can be no further justification for narrowly-legalistic deficit rules imposed by Brussels. “The security pact takes precedence over the stability pact. France is at war,” he told the French parliament.

Defense cuts have been cancelled as far out as 2019 as the country prepares to step up its campaign to “eradicate” ISIS, from the Sahel in West Africa, across the Maghreb, to Syria and Iraq.

At least 17,000 people will be recruited to beef up the security apparatus and the interior ministry, fast becoming the nerve center of the country’s all-encompassing war against the ISIS network.

The new forces include 5,000 new police and gendarmes, 1,000 customs officials, and 2,500 prison guards. “I assume it will lead to an increase in expenses,” he said.

The combined effect amounts to a fiscal stimulus and may ultimately cushion the economic damage of terrorist attacks for the tourist industry, but the “rearmament” drive spells the end of any attempt to meet deficit limit of 3% of GDP enshrined in the Stability and Growth Pact. With France in open defiance, the reconstituted pact is now effectively dead.

The European Commission expects the French deficit to be 3.4% of GDP next year and 3.3% in 2017, but the real figure is likely to be much higher and will last through to the end of the decade. The concern is that this could push the country’s debt yet higher from 96.5% of GDP to nearer 100%, made worse by the effects of deflation on debt dynamics.

Mr Hollande said France will invoke article 42.7 of the Lisbon Treaty, the solidarity clause obliging other member states to come to his country’s help by “all means in their power”. It would be beyond parody for Brussels to continue insisting on budget rules in such a political context.

The French economy is slowly recovering as the triple effects of a weak euro, cheap oil, and quantitative easing by the European Central Bank combine to create a short-term blast of stimulus, but it still remains remarkably depressed a full six years into the post-Lehman cycle of global expansion.

Growth crept up to 0.3% in the third quarter after stalling earlier in the year. Unemployment is still stuck at 10.7% and has actually risen over recent months. “Momentum may fade in 2017 as tailwinds peter out,” said the Commission.

Professor Brigitte Granville from Queen Mary University of London said the country has been losing competitiveness within Europe’s monetary union for so long – not helped by a labor code still 3,648 pages – that it is now caught in a stagnation trap with the wrong intra-EMU exchange rate. She warned that the country is on a slow slide towards economic “catastrophe”.

A study by Nobel economist Gary Becker found that “the fear created by terrorism has huge and enduring effects on human behavior,” often out all proportion to the actual risk. This makes it extremely hard to predict the economic effects.

Tourism to Israel fell by two-thirds during the eighteen months after the Al-Aqsa Intifada, and air travel in the US fell by 15% in the year following the Twin Towers attack on 2001. The paper concluded that people are ultimately rational and learn to control their fear. Life goes on as normal.

Ambrose Evans-Pritchard is the International Business Editor of the London Telegraph.