Showing posts with label France. Show all posts
Showing posts with label France. Show all posts
Thursday, March 19, 2009
FRANCE'S ENORMOUS TAX BURDEN
WSJ reports that French president is under pressure of labor unions to raise taxes on the wealthy as an act of solidarity (link). Meanwhile, France's economy deteriorated significantly in the light of recession and turmoil of the financial crisis. The economy is expected to decline by 1,9 percent in 2009 on the annual basis. The forecasting prospect for French economy in 2010 is also a little grimmy. The IMF expects 0.7 percent economic growth in 2010 (link). The stagnation of France has been diagnosed as a consequence of high tax burden, inefficient and oversized public sector and rigid labor markets which hinder productivity growth and further deteriorate the already unsustainable social security and pay-as-you-go pension system when net financial liabilities increase exponentially in the share of the GDP. The OECD has shown an interesting comparison (link) of tax burden on labor supply in OECD countires. France, Belgium, Hungary and Germany are in the top ladder of tax burden on labor supply, where tax burden on average workers is very close or above 50 percent of labor cost while the OECD average is slightly below 40 percent.
Monday, May 19, 2008
FRENCH WELFARENOMICS
Here (link) is an interesting story from The Economist which discusses huge price disparities between French and German retailers. For example, a basket of almost identical durable goods costs 30 percent more in France than in Germany.
The article reports that in many places in France there are local retail monopolies protected against domestic and foreign competition. There is also no free negotiation with suppliers, the sale of non-prescription drugs is prohibited, and the consumers do not support the new law that would deregulate the retail market to liberalize entry conditions and enforce competitive mechanism.
There is a well-known fact from microeconomic theory that consumer demand curve for monopoly firm equals average revenue of the monopoly firm and that monopoly firm will never like rigid or completely elastic demand but the elasticity of demand that will be equal to 1, given the point of the maximum profit taken by the monopoly firm. Hence, the price charged by the monopolist is P = MC/1+(1/Ex,px) which means that greater monopoly power leads to higher mark-ups. And also, the allocative inefficiency of the monopoly means that firm will set the price at the point where marginal revenue and marginal cost are crossed. Hence, higher prices and quantity regulation maximize the profit of the monopoly firm but consumers face a significant welfare loss.
In France, however, only 42 percent of the respondents favored more competitive retail market while 85 percent favored sales tax cuts and 72 percent prefered the rise in the minimum wage. Competitive market is always the only way to break the rigidity and monopoly position of the firm inparticular markets. For example, if there would be sales tax cut, that would not change the structure of the market but it would have an effect on the price elasticity of demand and since a local monopoly firm would face changes in the composition of the local demand, a tax cut would ease the prices but would still give local monopoly firms incentives to impose the mark-up. A rise in the minimum wage is a fallacy that, empirically, results in the rise of the unemployment and further labor market rigidity that hinders the growth of real productivity, decreases job growth and does not stimulate the real increase in purchasing power parity since higher prices, charged by firms to cover-up the loss from minimum wage, discourage the increase in purchasing power that is not linked to real productivity growth.
The article reports that in many places in France there are local retail monopolies protected against domestic and foreign competition. There is also no free negotiation with suppliers, the sale of non-prescription drugs is prohibited, and the consumers do not support the new law that would deregulate the retail market to liberalize entry conditions and enforce competitive mechanism.
There is a well-known fact from microeconomic theory that consumer demand curve for monopoly firm equals average revenue of the monopoly firm and that monopoly firm will never like rigid or completely elastic demand but the elasticity of demand that will be equal to 1, given the point of the maximum profit taken by the monopoly firm. Hence, the price charged by the monopolist is P = MC/1+(1/Ex,px) which means that greater monopoly power leads to higher mark-ups. And also, the allocative inefficiency of the monopoly means that firm will set the price at the point where marginal revenue and marginal cost are crossed. Hence, higher prices and quantity regulation maximize the profit of the monopoly firm but consumers face a significant welfare loss.
In France, however, only 42 percent of the respondents favored more competitive retail market while 85 percent favored sales tax cuts and 72 percent prefered the rise in the minimum wage. Competitive market is always the only way to break the rigidity and monopoly position of the firm inparticular markets. For example, if there would be sales tax cut, that would not change the structure of the market but it would have an effect on the price elasticity of demand and since a local monopoly firm would face changes in the composition of the local demand, a tax cut would ease the prices but would still give local monopoly firms incentives to impose the mark-up. A rise in the minimum wage is a fallacy that, empirically, results in the rise of the unemployment and further labor market rigidity that hinders the growth of real productivity, decreases job growth and does not stimulate the real increase in purchasing power parity since higher prices, charged by firms to cover-up the loss from minimum wage, discourage the increase in purchasing power that is not linked to real productivity growth.
Saturday, January 12, 2008
SARKOZY'S STATISM
French president Nicolas Sarkozy proposed a taxation on internet access and mobile phone use in order to prop up the funding of two public TV channels, free of advertising (link).
Saturday, December 22, 2007
FRANCE'S ECONOMY
The Economist published a brief outline about France's economy, showing what is actually behind disease of rachitic growth and status quo.
"In the late 1990s, France's economy grew faster than the European average, allowing the Socialist government to indulge in such goodies as the 35-hour work week. But the country's cherished social model has in recent years proved a strong disincentive to growth and to job creation. Unemployment is double that in Britain, and special public-sector pensions and rising health-care costs are straining the public finances.
Discontent with the economy—and the government’s handling of it—played a large part in France's rejection of the EU constitution. But, as usual in France, economic reforms smacking of libéralisme have met strong resistance: in the spring of 2006, after weeks of protests, the government dropped a proposed loosening of first-job contracts. Nicolas Sarkozy, elected president in May 2007, has promised reforms, although his first budget reduced neither public spending nor public debt, and his movement toward public-sector pension reforms provoked strikes."
Source: Economist, Finance & Economics Backgrounder (link)
"In the late 1990s, France's economy grew faster than the European average, allowing the Socialist government to indulge in such goodies as the 35-hour work week. But the country's cherished social model has in recent years proved a strong disincentive to growth and to job creation. Unemployment is double that in Britain, and special public-sector pensions and rising health-care costs are straining the public finances.
Discontent with the economy—and the government’s handling of it—played a large part in France's rejection of the EU constitution. But, as usual in France, economic reforms smacking of libéralisme have met strong resistance: in the spring of 2006, after weeks of protests, the government dropped a proposed loosening of first-job contracts. Nicolas Sarkozy, elected president in May 2007, has promised reforms, although his first budget reduced neither public spending nor public debt, and his movement toward public-sector pension reforms provoked strikes."
Source: Economist, Finance & Economics Backgrounder (link)
Monday, October 29, 2007
FRANCE: ECONOMIC FORECAST
The Economist highlighted the economic data on France (link). The forecast seems stable with a bulk of structural frictions such as the resistance to the reforms of the labor market structure. Growth prospects seem sluggish in the long-term perspective.
By 2010, the output growth rate is not expected to surpass 2 percent. Public finances are weak, reflecting the postponed pension reform. Enormously high pension outlays partly reflect the pressures holding France's public spending on record highs.
High public spending combined with punitive tax rates on income and productive behavior further discourage France's growth prospects. The fiscal consolidation is likely to remain slow. Budgetary spending remains anchored in deficit and the policymakers do not show any sign of turning budget deficit into surpluses as growth might accelerate at a faster pace.
The exchange rate is strong and the domestic prices are not expected to pose a threat to a stable and low inflation which peaked at 1,6 percent by 2007 subject to EU-harmonised measure.
On the growth side, household consumption is high and remains a mandatory GDP component. As a worrying sign, government consumption is currently higher than gross fixed capital formation in the share of the GDP despite the efforts to reduce direct taxes on corporate income and labor supply.
Read also:
Jurgen Reinhoudt: Showtime for Sarkozy, American.com (link)
The Economist: Country Briefings: France, Economic Structure (link)
The Economist: Country Briefings: France, Economic Data (link)
By 2010, the output growth rate is not expected to surpass 2 percent. Public finances are weak, reflecting the postponed pension reform. Enormously high pension outlays partly reflect the pressures holding France's public spending on record highs.
High public spending combined with punitive tax rates on income and productive behavior further discourage France's growth prospects. The fiscal consolidation is likely to remain slow. Budgetary spending remains anchored in deficit and the policymakers do not show any sign of turning budget deficit into surpluses as growth might accelerate at a faster pace.
The exchange rate is strong and the domestic prices are not expected to pose a threat to a stable and low inflation which peaked at 1,6 percent by 2007 subject to EU-harmonised measure.
On the growth side, household consumption is high and remains a mandatory GDP component. As a worrying sign, government consumption is currently higher than gross fixed capital formation in the share of the GDP despite the efforts to reduce direct taxes on corporate income and labor supply.
Read also:
Jurgen Reinhoudt: Showtime for Sarkozy, American.com (link)
The Economist: Country Briefings: France, Economic Structure (link)
The Economist: Country Briefings: France, Economic Data (link)
Tuesday, September 11, 2007
THE OPPOSITE EFFECTS OF PROTECTIONISM AND STATISM
"France should work for a much more offensive policy of protection, solidarity and regulation," says the French minister of foreign affairs.
The failure of protectionism
Contrary to popular asserted beliefs, the policy goals aimed at the enforcement of protective trade policy results the opposite effects. At the government level, extensive intervention in the form of company ownership reduces the competitive ability of the owned companies to compete in the open world markets.
Government officials have in fact different objectives than strategic investors. In terms of international trade, the restriction of imports from abroad, impairs the ability of gains from free trade and open exchange. In larger terms, even investment can be hampered as capital and technology may not be openly availible in the domestic market. If high tariffs and quotas are imposed on certain imports, the effect is three-fold. First, the enterprises and the economy are forced to pay an extra price for goods that are vitally needed to be purchased as estimated by the firm.
Practically, if a global economic environment of the firm is sourced by cutting-edge technology that could rapidly improve the productivity of the firm per unit of output, but the competitive and productivity potential is swiftly reduced as a possible 10% tariff on high-tech products from India causes an increase in firm's costs.
Second, assume that customers demand improved tech products which can be purchased in the firm which imports those products from India. Then tariff's mark-up on the price would inevitably result in the higher final customer retail or wholesale prices.
And third, high tariffs rate and protectionist trade policy with a bulk of formal and informal barriers, distort the general equilibrium and in this particular case, the only way to match supply and demand is the so called product smuggling resulted in the rise of informal economy which, ceteris paribus, reduces the overall output of the economy.
The anti-social effect of solidarity
Labor unions often expose how labor solidarity should remain an untouchable social value. In the rethorics and slogans of Karl Marx and contemporary socialist terminology, the leaders of the labor unions compose threats such as collective strikes in case if wage-increase demands are not fully accomplished. In macroeconomic terms, the spiral of unparalled wage growth boosts inflation pressures and diminishes the effect of benefits derived from the productivity growth. In effective terms, assume that trade unions achieve the periodic wage increase through collective demands.
After a sudden increase in the growth of real wages, the growth of productivity is negative while the union pressure on wage growth continues. Reasonably, the manager of the company will be forced to cut the exceeding labor quantity by firing to prevent the company's collapse.
Collectivism's Road to Serfdom
In the global economic environment where the regulatory burden and protectionism turn out into comparatively advantageous competitive environment of the firm, the outcome of strict enforcement of protectionism and collective union demands would, as demonstrated above, result in a lagging and stagnating economy facing low output growth rate, rachitic productivity growth and the spiral of upward inflationary pressures.
In fact, as the history has demonstrated many times, collectivism produces anti-social effects.
The failure of protectionism
Contrary to popular asserted beliefs, the policy goals aimed at the enforcement of protective trade policy results the opposite effects. At the government level, extensive intervention in the form of company ownership reduces the competitive ability of the owned companies to compete in the open world markets.
Government officials have in fact different objectives than strategic investors. In terms of international trade, the restriction of imports from abroad, impairs the ability of gains from free trade and open exchange. In larger terms, even investment can be hampered as capital and technology may not be openly availible in the domestic market. If high tariffs and quotas are imposed on certain imports, the effect is three-fold. First, the enterprises and the economy are forced to pay an extra price for goods that are vitally needed to be purchased as estimated by the firm.
Practically, if a global economic environment of the firm is sourced by cutting-edge technology that could rapidly improve the productivity of the firm per unit of output, but the competitive and productivity potential is swiftly reduced as a possible 10% tariff on high-tech products from India causes an increase in firm's costs.
Second, assume that customers demand improved tech products which can be purchased in the firm which imports those products from India. Then tariff's mark-up on the price would inevitably result in the higher final customer retail or wholesale prices.
And third, high tariffs rate and protectionist trade policy with a bulk of formal and informal barriers, distort the general equilibrium and in this particular case, the only way to match supply and demand is the so called product smuggling resulted in the rise of informal economy which, ceteris paribus, reduces the overall output of the economy.
The anti-social effect of solidarity
Labor unions often expose how labor solidarity should remain an untouchable social value. In the rethorics and slogans of Karl Marx and contemporary socialist terminology, the leaders of the labor unions compose threats such as collective strikes in case if wage-increase demands are not fully accomplished. In macroeconomic terms, the spiral of unparalled wage growth boosts inflation pressures and diminishes the effect of benefits derived from the productivity growth. In effective terms, assume that trade unions achieve the periodic wage increase through collective demands.
After a sudden increase in the growth of real wages, the growth of productivity is negative while the union pressure on wage growth continues. Reasonably, the manager of the company will be forced to cut the exceeding labor quantity by firing to prevent the company's collapse.
Collectivism's Road to Serfdom
In the global economic environment where the regulatory burden and protectionism turn out into comparatively advantageous competitive environment of the firm, the outcome of strict enforcement of protectionism and collective union demands would, as demonstrated above, result in a lagging and stagnating economy facing low output growth rate, rachitic productivity growth and the spiral of upward inflationary pressures.
In fact, as the history has demonstrated many times, collectivism produces anti-social effects.
Sunday, September 02, 2007
FRANCE: GROWTH OR STAGNATION?
Despite the historic highs in economic growth, some European countries are economic laggards. Marred by tight labor market conditions, protectionist policy, high unemployment benefits and generous welfare expenditures, France's global position currently emulates low output growth rates. Meanwhile, the aggregate tax burden as a share of the GDP is among the highest in the world. Recently, France's president intiatiated several panel proposals to boost France's global competitiveness and economic performance.
In international comparison, French economy has a relatively high productivity rate. But behind this measure, there is a cautious explanation. Since France has one of the largest population of retirees in the world, the aggregate productivity depends on the ability of the existing labor force to sustain competitive productivity growth rate. In addition, a large amount of per unit productivity is penalized by high taxes and welfare contributions rates. Recent surveys (OECD, 2007) have shown that France has a high rate of hourly productivity and that there is a significant sectoral variability of the growth rates of productivity respectively.
The reason for a rachitic aggregate productivity level is the length of the workweek. Previously, French policymakers imposed a 35-hour working week. The overall loss of productivity gains has been immensive while the relative gap of productivity outfall further diminished the competitiveness of the French economy in the international perspective. One of the most hindering characteristics of a rigid labor market is the negotiating power that labor unions possess over wage claims and strikes against pro-growth measures aimed at an improvement of the company performance and aggregate productivity as well. There is much empirical evidence on negative correlation between growth behavior and extensive collective bargaining, meaning that deregulated labor market does not impede the growth of productivity since the allocation of resources absorbs the gains from output behavior easier than under extensively regulated conditions set by the misallocated collective instruments exercised in the labor market. The fact is that collective trade unionism lacks the use of information and knowledge to reach optimal decisions regarding choice aspects. In the state of collective bargaining over working time and labor utilization, there is always an expense at which the most productive labor units are penalized while the under-productive labor force, which generates a majority of extensive trade union power, gains. Consequently, the most productive labor force which usually does not engage in wage claims, face an overall loss since the output of productivity is generated into consumption and wage claims by the external income redistribution.
France's climate and environment for doing business is ranked way below the most competitive and business-friendly destinations for entrepreneurship (link). For instance, the cost of property registration is 6,8 percent of the property compared to the average of 4,3 percent in the average of OECD countries. The operating conditions of the economic climate and confidence is further depressed by the low score of economic liberty where France ranks 45th in the world and 21st in Europe. One of particular concerns is a restrictive and regulatory code regarding the investment conditions. Despite a relatively high level of the sophistication of financial products and market incentives, the regulation of product and financial markets is high and companies face significantly high payroll and income taxes. The fact that the investment climate is not dynamic and open is the notion that foreign direct investment is restricted in a number of sectors such as airplane transport, telecommunications, tourism...
France, known for its tradition of old-style Gaulist state intervention, currently prolongs a very rigid labor market with all of its damaging symptoms such as rigid restrictions regarding the increase in working hours, high non-salary costs of employing workers from the labor market, high tax wedge levied on the most productive workers and staunch rules regarding hiring and firing. Sarkozy's agenda on the state of labor market seems favorable to the prospects of productivity growth as well as to the reduction of external costs:
"On tax and labour-market policy, Mr Sarkozy is pursuing a deregulating agenda, hoping to free up business, and stimulate growth and job creation. On industrial policy, however, it is far from clear that Mr Sarkozy believes in letting the market decide."
Source: The Economist (link)
It will surely be interesting to see what the outcome of Sarkozy's market agenda will be since the size of government spending in France is among the highest in the industrialized world. Total government expenditures in France, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 53,7 percent of GDP. The revenue from state-owned firms equals 3,9 percent of the GDP. There is a numerous evidence on the negative comparative effects of state (political) ownership of firms since the government ownership of enterprises is subject to political agenda instead of setting market objectives. Another negative side-effect produced by government ownership of industrial companies and firms is that the aim is not to pursue value and quality to its customers but rather to protect domestic firms against external competition such as sectoral strategic, direct or portfolio investment of foreign-owned firms.
If French policymakers really want to pursue the liberalization of the market, then it would be silly to push for larger state intervention such as protecting the industrial companies against the competitive pressures without which the economy would stagnate in the medium-run and sustain rachitic, minimal output growth.
In international comparison, French economy has a relatively high productivity rate. But behind this measure, there is a cautious explanation. Since France has one of the largest population of retirees in the world, the aggregate productivity depends on the ability of the existing labor force to sustain competitive productivity growth rate. In addition, a large amount of per unit productivity is penalized by high taxes and welfare contributions rates. Recent surveys (OECD, 2007) have shown that France has a high rate of hourly productivity and that there is a significant sectoral variability of the growth rates of productivity respectively.
The reason for a rachitic aggregate productivity level is the length of the workweek. Previously, French policymakers imposed a 35-hour working week. The overall loss of productivity gains has been immensive while the relative gap of productivity outfall further diminished the competitiveness of the French economy in the international perspective. One of the most hindering characteristics of a rigid labor market is the negotiating power that labor unions possess over wage claims and strikes against pro-growth measures aimed at an improvement of the company performance and aggregate productivity as well. There is much empirical evidence on negative correlation between growth behavior and extensive collective bargaining, meaning that deregulated labor market does not impede the growth of productivity since the allocation of resources absorbs the gains from output behavior easier than under extensively regulated conditions set by the misallocated collective instruments exercised in the labor market. The fact is that collective trade unionism lacks the use of information and knowledge to reach optimal decisions regarding choice aspects. In the state of collective bargaining over working time and labor utilization, there is always an expense at which the most productive labor units are penalized while the under-productive labor force, which generates a majority of extensive trade union power, gains. Consequently, the most productive labor force which usually does not engage in wage claims, face an overall loss since the output of productivity is generated into consumption and wage claims by the external income redistribution.
France's climate and environment for doing business is ranked way below the most competitive and business-friendly destinations for entrepreneurship (link). For instance, the cost of property registration is 6,8 percent of the property compared to the average of 4,3 percent in the average of OECD countries. The operating conditions of the economic climate and confidence is further depressed by the low score of economic liberty where France ranks 45th in the world and 21st in Europe. One of particular concerns is a restrictive and regulatory code regarding the investment conditions. Despite a relatively high level of the sophistication of financial products and market incentives, the regulation of product and financial markets is high and companies face significantly high payroll and income taxes. The fact that the investment climate is not dynamic and open is the notion that foreign direct investment is restricted in a number of sectors such as airplane transport, telecommunications, tourism...
France, known for its tradition of old-style Gaulist state intervention, currently prolongs a very rigid labor market with all of its damaging symptoms such as rigid restrictions regarding the increase in working hours, high non-salary costs of employing workers from the labor market, high tax wedge levied on the most productive workers and staunch rules regarding hiring and firing. Sarkozy's agenda on the state of labor market seems favorable to the prospects of productivity growth as well as to the reduction of external costs:
"On tax and labour-market policy, Mr Sarkozy is pursuing a deregulating agenda, hoping to free up business, and stimulate growth and job creation. On industrial policy, however, it is far from clear that Mr Sarkozy believes in letting the market decide."
Source: The Economist (link)
It will surely be interesting to see what the outcome of Sarkozy's market agenda will be since the size of government spending in France is among the highest in the industrialized world. Total government expenditures in France, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 53,7 percent of GDP. The revenue from state-owned firms equals 3,9 percent of the GDP. There is a numerous evidence on the negative comparative effects of state (political) ownership of firms since the government ownership of enterprises is subject to political agenda instead of setting market objectives. Another negative side-effect produced by government ownership of industrial companies and firms is that the aim is not to pursue value and quality to its customers but rather to protect domestic firms against external competition such as sectoral strategic, direct or portfolio investment of foreign-owned firms.
If French policymakers really want to pursue the liberalization of the market, then it would be silly to push for larger state intervention such as protecting the industrial companies against the competitive pressures without which the economy would stagnate in the medium-run and sustain rachitic, minimal output growth.
Friday, August 24, 2007
FRANCE'S EXCESSIVE REGULATION PROPOSAL WOULD DISTORT FINANCIAL MARKETS
"Capitalism without failure is like a religion without sin."
France responded to recent turmoils and frictions in credit markets by calling for tougher and tighter regulation of global financial markets. Clearly, recent dynamics of credit markets and ECB's strongest intervention yet, reflect the turbulence and heating of risk over debt securities in avoiding speculation and credit default swamps which notably increase the probability of financial crisis (Mishkin, Herbertsson 2006).
The question is whether regulative pressures to disclose more of particular data and information about traded financial products could ease the credit flows and ensure more transparency. Since information is the most valuable tool in picking-up financial products to invest in particular assets with sufficient return predictions, adding trickier code laws would simply burden the ability of financial markets to catch growth momentum and enforce risk management rules to respond to the volatility of the level markets properly. Risk management is of course an important aspect of decision-making in globally competitive markets. In addition, pressures for more information disclosure would enforce control over credit and broadly financial markets.
Financial markets are faced by risks and shocks every day and failures which occur frequently could hardly be a reasons for imposing more regulation on decision-makers. One of the ways to confront risk-taking and risk-minimization measures is to ensure a broader access to particular funds, thus to provide sound sources of liquidity.
Recently, France's finance minister stressed (link):
"We have been proven right. We need more transparency and better governance in financial markets and we need it on a G-7 basis."
The evaluation of risk which investors and creditors face in the course of financial market, crucially depends on the ability to reduce the risk of biased information regarding decision-making in particular activity, say hedge fund industry or private equity investment. Transferring the liabilites of governance and transparency to a global body would fail already in the short-run because the amount of information needed to be absorbed and the lack of acceptance of risk in terms of responding to the outcome of the excessive regulation, are the prime reasons why globally enforced regulation would punish and penalize financial markets which could face significant distortions and risk aversion leading to lower returns and discounted ability to target particular markets with particular financial products respectively.
Recently published in Wall Street Journal, Allan Meltzer wrote a simple fact which politicians obviously can't understand:
"But whatever the perceived problem, more regulation is not the answer. It is far better to change some incentives for excessive risk-taking."
Because the regulation of credit and financial markets does not achieve stated objectives, information-sharing pressure reversingly forces equity investors, traders and market actors in particular financial industry to disclose the information required and this, in turn, leads to more complexity and government's control over the financial markets to go for an intervention which is perceived as a negative affection of stock market performance. For instance, could the regulation of carried risk in hedge fund industry really ensure more transparency if trading is conducted on the basis of contract deals where the treatment of information is regarded as contract stakers negotiate.
If the assessment of risk is perceived as low and underestimated, than the portfolio and price reassessment boosted by spontaneous market behavior would give bankers, traders and investors a far better incentive to re-evaluate the risk involving repackaged debt securities. A regulation such as proposed by France's policymakers rather induce external risk pressures to hit hedge fund industry, stock market and private equity firms, causing more harm than good.
The cinism of France's minister of finance is well seen:
"It's not a question of forbidding trading or barring market activity, it's making sure that the sophistication of financial products does not get so complicated that even investors dealing in those products are lost as to what they actually are."
So according to this statement, government officials know better how and where to allocate market resources to maximize the return from financial markets by purchasing traded products at agreeable conditions to traders and investors/purchasers. Market fluctuations are a daily reaction to innumerable decisions and contracts in the financial markets. The assessment of product sophistication could hardly be attached to government's responsibility. The proper degree and size of regulation is much better managed trhough contract deals at which both sides agree on terms and conditions involving particular products to take action in financial markets. In sum, transparency of particular financial products is the matter of the contractual enforcement and the reflection of dealing preferences and the overall efficiency of trading and financial markets always gets worse when government decides to intervene the market with excessive regulation whereas the cost adjustment is high; both for the cost of government and the private trading sector's ability to akin compliance burden.
Allan Meltzer
France responded to recent turmoils and frictions in credit markets by calling for tougher and tighter regulation of global financial markets. Clearly, recent dynamics of credit markets and ECB's strongest intervention yet, reflect the turbulence and heating of risk over debt securities in avoiding speculation and credit default swamps which notably increase the probability of financial crisis (Mishkin, Herbertsson 2006).
The question is whether regulative pressures to disclose more of particular data and information about traded financial products could ease the credit flows and ensure more transparency. Since information is the most valuable tool in picking-up financial products to invest in particular assets with sufficient return predictions, adding trickier code laws would simply burden the ability of financial markets to catch growth momentum and enforce risk management rules to respond to the volatility of the level markets properly. Risk management is of course an important aspect of decision-making in globally competitive markets. In addition, pressures for more information disclosure would enforce control over credit and broadly financial markets.
Financial markets are faced by risks and shocks every day and failures which occur frequently could hardly be a reasons for imposing more regulation on decision-makers. One of the ways to confront risk-taking and risk-minimization measures is to ensure a broader access to particular funds, thus to provide sound sources of liquidity.
Recently, France's finance minister stressed (link):
"We have been proven right. We need more transparency and better governance in financial markets and we need it on a G-7 basis."
The evaluation of risk which investors and creditors face in the course of financial market, crucially depends on the ability to reduce the risk of biased information regarding decision-making in particular activity, say hedge fund industry or private equity investment. Transferring the liabilites of governance and transparency to a global body would fail already in the short-run because the amount of information needed to be absorbed and the lack of acceptance of risk in terms of responding to the outcome of the excessive regulation, are the prime reasons why globally enforced regulation would punish and penalize financial markets which could face significant distortions and risk aversion leading to lower returns and discounted ability to target particular markets with particular financial products respectively.
Recently published in Wall Street Journal, Allan Meltzer wrote a simple fact which politicians obviously can't understand:
"But whatever the perceived problem, more regulation is not the answer. It is far better to change some incentives for excessive risk-taking."
Because the regulation of credit and financial markets does not achieve stated objectives, information-sharing pressure reversingly forces equity investors, traders and market actors in particular financial industry to disclose the information required and this, in turn, leads to more complexity and government's control over the financial markets to go for an intervention which is perceived as a negative affection of stock market performance. For instance, could the regulation of carried risk in hedge fund industry really ensure more transparency if trading is conducted on the basis of contract deals where the treatment of information is regarded as contract stakers negotiate.
If the assessment of risk is perceived as low and underestimated, than the portfolio and price reassessment boosted by spontaneous market behavior would give bankers, traders and investors a far better incentive to re-evaluate the risk involving repackaged debt securities. A regulation such as proposed by France's policymakers rather induce external risk pressures to hit hedge fund industry, stock market and private equity firms, causing more harm than good.
The cinism of France's minister of finance is well seen:
"It's not a question of forbidding trading or barring market activity, it's making sure that the sophistication of financial products does not get so complicated that even investors dealing in those products are lost as to what they actually are."
So according to this statement, government officials know better how and where to allocate market resources to maximize the return from financial markets by purchasing traded products at agreeable conditions to traders and investors/purchasers. Market fluctuations are a daily reaction to innumerable decisions and contracts in the financial markets. The assessment of product sophistication could hardly be attached to government's responsibility. The proper degree and size of regulation is much better managed trhough contract deals at which both sides agree on terms and conditions involving particular products to take action in financial markets. In sum, transparency of particular financial products is the matter of the contractual enforcement and the reflection of dealing preferences and the overall efficiency of trading and financial markets always gets worse when government decides to intervene the market with excessive regulation whereas the cost adjustment is high; both for the cost of government and the private trading sector's ability to akin compliance burden.
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