Chapter 8 Stabilization Policy

http://econ-dt.blogspot.com/2009/04/chapter-8-blog.html



Summary:

The article I read is from the Economy Report by ANNA WILLARD Reuters about France's flaw in her economy act as a cushion to the recession. France has been able to avoid severe impact on her economy because her economy is not majorly active like that of export champion Germany or Britain. Even though this is an advantage right now, studies reveal that this safeguard will slow down the French economy in terms of recovery compared to the other European nations. President Nicholas Sarkozy suggest a more dynamic approach to France's economy. In truth, the French economy contracted 1.2 percent for the first three months of this year according to a Reuters poll. Yet compared to the 1.6 percent for the euro zone, and 1.4 percent for Britain, France has been able to cushion itself from the decline in GDP experienced in other European countries. Yet even with the side effects of a slower economic recovery, studies reveal that France, Britain, and Germany will be recovering at the same rate in 2010. The French economy has been cushioned from the recession because of disinflation and a wage structure that prevents salaries from being adjusted during economic downturns. In addition, strict employment laws prevents companies to lay-off workers in recessionary times. Also, France's economy is not base on exports. Hence, GDP changes would not affect their economy as much as those that do rely on exports ( Germany and Britain) to stimulate thier economy. Automatic Stabilizers have also helped those struggling under the recession with unemployment benefits. Because it is expected that economic recovery will be slower than the other European nations, President Sarkozy introduce the needs for reform, especially in the labour market.

Connection

I believe the connection of this article to our text is approaches to stabilization policy. When economic conditions change for better or worse, it is the government's job to re-establish equilibrium to the change. The actions that the French economy decided to take is an excellent example of stabilization. Because they realize that their economic recovery will be slower than the other European nations, reforms in their fiscal policies are made to compensate for the cushion effect on the recession. Had president Sarkozy not suggest a dynamic approach to the economy, a stagflation is likely to result. With unemployment insurance programs and other forms of benefits, the prosperity to spend and the circular flow of money is likely to increase causing the GDP to rise. Another factor taking place in France would be the decreasing price and the rise in unemployment. In terms of Phillips curve, unemployment and inflation is inversely proportional. Hence, in order to combat unemployment in France, series of unemployment program are created at the cost of higher rates of inflation in the future.

Reflection

Although the strict employment policies are preventing workers from being laid-off in the current recession, its disadvantage lies in the long run because it will increase employer's reluctance to hire.This can prove to be a major problem becuase as the global economy begins economic recovery, employees will still be struggling to find permanent jobs and this will become a set back to the French economy who are slower in terms of recovery. As mentioned in the article, GDP can actually contract and France could experience another period of negative GDP growth. Thus, I believe that reforms need to be made not only in the Fiscal Policy, but the employment programs as well. I understand the need for discpline and strictness in times of recession. Yet, I believe that a more flexilbe approach to employment will yield the best results in terms in economic recovery for France. In truth, France's economic policies may cushion the effects of recession and provide stability. However in the long run, it hinders growth and recovery of the economy.