The French Election and Globalization

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Hey, it looks as if even the French don't believe in the French economic model, the one that has given them sluggish economic growth of 1 percent (2003), 0.5 percent (2004), 2.1 percent (2005), and 1.2 percent (2006) over the past four years and a current unemployment rate of over 8 percent. What other conclusion can be drawn, after all, from the crushing victory of Nicolas Sarkozy over Sègoléne Royal in last weekend's French presidential election?

Morgan Stanley analyst Eric Chaney explains that Sarkozy won "by arguing that a break in the management of the economy was necessary, that the 'French model' did not work anymore, that France should learn from other European countries which have achieved full employment, and that the election of the president should be a 'referendum for reforms.' This makes his election all the more important for France: If Sarkozy lives up to his promises, this could be the beginning of long-overdue structural reforms for the French economy."

Sarkozy-nomics: more-flexible labor markets, lower taxes, deregulation, smaller government. But the two megatrends underlying the Sarkozy victory are 1) an aging population that makes leviathan social welfare states financially untenable and 2) globalization that is forcing countries to optimize their economies to make them more competitive. Those are trends Americans should pay close attention to since they affect us as well. Take the issue of international competitiveness and corporate income tax rates. Since 1993, consulting firm KPMG has surveyed rates around the world. The average corporate tax rate stood at 38 percent then vs. 27.1 percent today. The firm's conclusion:

"The survey has recorded a consistent and dramatic reduction in corporate tax rates over that 14-year period. This reduction began in the mid-1980s in the United Kingdom when the government of Margaret Thatcher lowered the corporate tax rate from 52 percent to 35 percent between 1982 and 1986, forcing other countries to follow suit. Once one major industrialized economy cuts its rates, others seem compelled to do the same, in a process of international tax competition that continues and intensifies over time. ... This competition suggests that there must be some benefit in having low corporate taxes, and indeed it appears that countries that adopt comparatively low tax rates tend to do better in terms of growth and inward investment than those that do not. But does this mean that countries are locked into a "race to the bottom" in tax rates? Policymakers, faced with the need to fund social programs, may fear revenue shortfalls if they simply reduce corporate income tax rates, even though there is a tendency among high tax rate countries not to rely substantially on revenue from this source. In the long term, low tax rates should attract more inward investment, which should expand the economy and thereby provide a greater tax base."

Among the G-7 countries back in 1993, Canada, Germany, Italy, and Japan had higher corporate tax rates than the United States. Now only Japan does, as the United States has kept its rate at 40 percent.