Jean-Paul Fitoussi

What first assessment can be made of the monetary strategy since 1999?

Introduction

Assessing the ECB's performance is unusually difficult because both the Bank and the context within which it operates -the integration of 12 national foreign exchange markets -are so radically new. There is no historical precedent. Nor are there any criteria against which to judge monetary policy designed for a group of states, which are closely integrated but fall short of a federal structure. One does not need to be an economic expert to appreciate that monetary policy is much more complicated in this novel situation than it is for in a nation state or a federation which can resort to historical precedents. There are technical difficulties -eurozone statistic are far less reliable as a basis of policy decisions than national ones -and political ones, in particular the preponderance of national interests. European governments still tend to europeanise their problems and nationalise their successes. Since European integration is still very much a work in progress, it is all too easy to criticise the work of the ECB, not least because it is build on various, perhaps even conflicting ulterior motives.

Any evaluation of the ECB's first years in action has to start with the fact that the worst fears of the single currency's opponents have not materialised. Economic growth has not been stifled by a soaring euro; on the contrary. And the recent appreciation of the currency has geopolitical roots. If anything, the ECB's policy has stimulated economic growth as real interest rates have been much lower compared with the low-growth period of 1991-97. Nor has the euro's weakness generated a significant rise in inflationary pressure. Against this background, the ECB's monetary policy appears more effective than the monetary policies of the EU's national central banks that preceded it. This positive assessment should put the more critical comments that are to follow into context. Although the ECB has done well, there is room for improvement, especially since it is still a young institution that may have a lot to learn from its own mistakes. I will conduct this assessment in two steps. The first is a quick analysis of the decisions by the European Central Bank, that as we shall see has gone through different phases both regarding its activism and its efficacy. The second step is an attempt to relate these phases to the doctrine that underlies the action of the ECB and/or to the difficulties that arose from the fact that it is a newly established institution.

The European Central Bank in action

If the overall assessment is pretty positive, it is because the ECB is a young institution that has to manage monetary policy in reference to an heterogeneous area, and that in a few years had to go through a series of significant external shocks: The effects of the East Asian crisis; the Oil "mini-shock"; the food prices increase due to animal diseases and bad weather; the depreciation of the Euro; the US slowdown; the terror attacks of September 11; and the slow agony of stock markets. All of these shocks have had, with different delays, effects on prices, and hence had to be addressed by the ECB in its decisions about interest rates. For these reasons the task was not easy and the Bank dealt with it quite skilfully.

But if the ECB has done well, there is room for improvement. In effect, looking at the same shocks chronologically, and analysing how the ECB reacted, one is left with the impression of an insufficient degree of reactivity of the Bank, which may have its roots in too restrictive a conception of the role of monetary policy1 .

In a first phase, from the launching of the Euro to the fall of 1999, the Bank took an expansionary stance to face the deflationary effects of the East Asian crisis. In April 1999 its main refinancing rate went down from 3% to 2.5%, until the following September. Over this period it became clear to the observers that the inflation target had a lower bound, as the ECB cared about the danger of deflation as well.

The second phase began in the fall of 1999 in response to the second and third shocks, namely an increase of inflation due to food and oil prices. These factors, in addition to Euro depreciation, increased imported inflation and pushed the ECB to change its stance to restrictive. Over the following year the refinancing rate was progressively brought up to reach 4.75% in November 2000.

The third phase marks a change in attitude of the ECB. In spite of clear and increasing signs of economic slowdown, the Bank kept its rate unchanged until May 2001. At that moment, it began a timid rate reduction in response to the US recession and the continuing European slowdown, bringing the rates down of 25 basis points; the same reduction was carried over a few months later, in August. A more serious cut, of half a point, occurred at mid September, but it was of course more due to the exceptional circumstances created by the WTC attacks than to a real concern for growth. In fact, over the following couple of months the Fed proved to be largely more aggressive in its rate cuts. At the end of 2001 the Fed funds rate was at 2%, while the Refinancing Rate of the ECB was only cut of a further half point to 3,25% (November 2001). It would not move from that level until the half point decrease of December 2002, in spite of sluggish growth and decreasing inflation (especially once the transitory effects of the introduction of the Euro are discounted). This inertia is even more puzzling if we consider that over the year 2002 the Euro appreciated of more than 25% with respect to the US dollar2 , and that a further appreciation is expected.

The principles guiding the ECB monetary policy

What does this rough division in phases tells us about the principles that guided the ECB action? Mainly two things. The first is that the Bank was reactive to shocks that directly affected inflation (oil and food prices, Euro depreciation), but much less so to shocks that firstly had an impact on income and only through that channel on prices (as the US slowdown). The second, and related point, is that the ECB strictly followed its main objective (price stability), but much less so its secondary one, the promotion of economic growth, even when it was becoming evident to most observers that a cut in rates to sustain growth would not hamper the objective of price stability3 . To say it differently, the inertia that characterised the behaviour of the Bank since the beginning of 2001 shows that its behaviour was in fact not sufficiently forward-looking. The future disinflationary effects of the slowdown in growth were not taken into consideration.

Over the past year at least, there has been a growing consensus on the fact that the strategy of the ECB was not sufficiently balanced, and that its fear of inflation was excessive. The criticisms were so widespread that the ECB itself is carrying on an evaluation of its first years of activity, an initiative that has to be applauded, as it increases the degree of responsibility and hence of credibility of the Bank.

But then we are left with the central question: Why did the ECB focus so narrowly on inflation, both in its actions and in its communication strategy? Two explanations, strictly related, may be highlighted.

The first is that the ECB follows what has now become the new orthodoxy in Macroeconomics. As I argued in a previous report 4 , this orthodoxy amounts to reducing as much as possible the scope for policy, by constraining monetary policy to exclusively focus on price stability (possibly by preferring clear, intelligible rules to discretionary decisions), and by avoiding discretionary fiscal policy through the Stability Pact. According to this vision the task of enhancing growth and productivity should be exclusively left to structural reforms aimed at eliminating distortions particularly in the labour market. Whether this conceptual framework is coherent and convincing is not an issue to be addressed here. It is nevertheless obvious that it is shared by most central bankers in the industrialised countries. In spite of that, almost invariably, this theoretical orthodoxy is coupled with a much more pragmatic attitude in actual behaviour. The most striking case is the Federal Reserve, that continuously manoeuvred its interest rates to influence markets with the objective of keeping the economy on a low inflation-high growth path. Why is it so, then that the ECB seems to be practically the only central bank that make its acts coherent with monetary (and fiscal) orthodoxy?

This calls into play the second explanation, that is specific to the ECB: The need to establish a reputation. Credibility is an invaluable asset for an institution that deals with (financial) markets in which expectations have an essential role to play. This is a serious issue, and it would be unwise to disregard it. A young central bank has to convince markets that it is serious about reaching its objectives, and that it has the means and the skill to do it. Taking this into consideration, the restrictiveness of monetary policy, and the inertia that has characterised the ECB attitude facing the economic slowdown may be seen as signs that the Bank is focussing on its main objective, and that it does take the time to accumulate information in order to act efficiently.

While believing that these credibility considerations are important, I do not share the opinion that they should be sufficient to justify the course of action the ECB chose, particularly since early 2001. In fact, it is my opinion that the ECB has not gained much in credibility. If a restrictive policy was the price to pay in order to acquire credibility, then that price was largely paid in vain.

Through its actions, the ECB has acquired the reputation of being tough, but not of being as forward looking as it pretends. Patrick Artus and Charles Wyplosz5 have shown that if we take a standard measure of the influence of a central bank on agents expectations, namely the responsiveness of market-determined long term rates to changes in the Central bank rates, the ECB has been much less effective than the Fed and the Bundesbank.

There are various reasons why the ECB did not fully convince markets:

(a)

The first and more obvious is that the inflation objective the ECB has chosen is simply too ambitious. Even in a period of low growth, inflation was above the 2% threshold for all years except one (1999). And of course it is not beneficial to the reputation of a central bank to miss almost systematically its target. The 2% target reflects the particular circumstances in which it was decided (1998), a period of atypically low inflation. Most economists believe that a target between 2% and 3% would definitively be more appropriate6 .

(b)

The second reason regards the rule followed by the Bank in defining its strategy. The ECB has been following, at least in theory, the strategy called of the "two pillars", heritage of the compromises that underlie its creation; on one side, it was supposed to target money growth ( the "reference value" is 4.5% per year7 ); on the other hand, it had to take into account a composite indicator of inflationary pressures. In practice, the money growth objective was not followed, and the ECB simply focussed on the second pillar. But this ambiguity between the strategy the Bank was supposed to follow and the one it actually implemented, was a nuisance for the transparency of its acts, the effectiveness of its communication strategy, and finally damaged the ECB in its quest for credibility.

(c)

The third reason why the ECB has not yet established a good reputation is subtler, but at the same time it may potentially be the most important. In fact, it is impossible for a central bank to acquire credibility if, while attaining its objective, it imposes excessive costs to the society. Most theories advocating the sole objective of price stability rely on the hypothesis of rational expectations, that in turn implies an absence of social costs: Private agents correctly anticipate the bank's action, and their behaviour is modified accordingly with no effects on employment or growth. In these conditions price stability comes for free, and a central bank that does not pursue it acquires a negative reputation. But reality is another thing, and the low inflation objective often comes at the cost of reduced growth, as may have been the case in Europe in recent years. How credible can a central bank be, if in the middle of a general slowdown on both sides of the Atlantic, with the Euro zone economy on the brink of a recession, it refuses to lower rates because of a (largely undemonstrated) inflationary threat? The roots of this problem are not within the ECB itself, but rather in the Maastricht Treaty, that gives priority to inflation, and does not provide for accountability. Political accountability means that the Central Bank has to account for its actions in front of an institution that possessed the right -however carefully defined -to modify the Central Bank's statute. Although the ECB reports to the European Parliament, the latter has only the power of persuasion to influence the ECB. The fact that National Parliaments have hardly ever made use of this power does not prove that it serves no purpose. Its very existence force Central Banks to take into account the preoccupations of a country's elected representatives and make better use of the information available. As a consequence, the ECB has not to take into account the social costs of its actions, and may lack information on their magnitude. On the other hand, the American institutional set-up makes the Fed accountable (mainly in front of the Congress)8 , and gives it the task of pursuing the twin objectives of price stability and growth. In doing so, it forces the Central Bank to internalise the social costs of disinflation and hence to implement a more balanced and effective policy.

Conclusion

The analysis carried on in this short brief gives the possibility to conclude by advancing some proposals:

1.

The first is the easier to implement: The 2% objective for the inflation rate inflation is too low, and it has to be substantially revised. This can be done either by directly increasing it, or by allowing a larger fluctuation band around it. Regular (even if infrequent) revisions of the inflation ceiling would allow to adapt the ECB action to changing economic conditions.

2.

In order to increase the accountability of the ECB, the revision of the target rate should be carried on after consultation with politically elected organisms, like the Council and/or (preferably) the Parliament. Being democratically responsible, these institutions are more sensible to the social costs of monetary policy; involving them in the process, hence, would allow to internalise these costs into the ECB action. Of course the ECB would conserve its full independence of means.

3.

Increased transparency and simplicity are important determinants of credibility. The ECB should formally abandon the money growth objective (that is routinely overlooked) and make explicit the exclusive focus on the second pillar that is now hidden; by doing so, it could avoid baroque communication strategies. Furthermore, the Bank should clarify how the different economic indicators (expected inflation, output gap, exchange rate level, and so on) enter in its decision rule.

For a more detailed account of the first four years of the Euro, see Jean-Paul Fitoussi and Jerôme Creel: How to Reform The European Central Bank, Centre for European reform, London, October

The appreciation took place in two phases. The first, from the minimum (0.86 dollars for an Euro, at the end of January 2002), brought the two currencies to parity in July. The exchange rate then oscillated around 0.98 until November, when the upwards movement started again to reach the maximum of these days (1.08-1.09 dollars for an Euro).

The Maastricht Treaty gives the ECB the task of conducting "a single monetary policy and exchange rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Community" (Art. 3A, emphasis added). It is important to recall that in the United States the Humphrey-Hawkins Act of 1978 gives growth and price stabilisation the same weight in the Federal Reserve's statute.

Jean-Paul Fitoussi, "The Stability (and Growth) Pact and Monetary Policy" European Parliament Briefing paper n° 4-15 November 2002.

La politique monétaire de la Banque centrale européenne, Conseil d'Analyse Économique -La documentation Française.

See Fitoussi and Creel, How to Reform ..., op.cit., p. 42.

This may be arrived at by summing potential output growth, estimated at 2.5%, the target inflation rate, say 1.75%, and a trend shift in velocity of about 0.5% per year.

It is important to remark that this does not make it less independent. Lack of accountability and independence are not synonyms.


Jean-Paul Fitoussi

ECONOMIC AND MONETARY AFFAIRS

The euro area, after a poor growth performance in 2002, has stepped aside in 2003 the word economic recovery. Concurrently, as was easily predictable since its inception, all the flaws of the SGP emerged once the European economy started to loose speed. Compared to the strongly proactive fiscal policy in the US and the UK, Europe remained substantially inertial, with an almost neutral policy stance. As a result, and despite a growth rate of 0.4 % in 2003 -as compared with 3.1 % for the US and 2.3 % for the UK -the area had in 2003 a much lower public deficit than these two countries!

The main flaws of the SGP become then obvious: it lacks flexibility; it is asymmetric; it disregards the intertemporal content of public spending; it neglects the long term sustainability of public finance. The arguments -both theoretical and empirical -in favour of the SGP appear so weak that the question arises if it is not following a hidden agenda.

Reform proposals have been advocated since long and they are not mutually exclusive: --to focus on structural deficits --to apply the golden rule of public finance, the task of defining what belongs to investment spending being left to the European council and to the European parliament.

--to take into account long term sustainability, not so much as a mean of punishing high debt countries, but to reward low debt ones. But even if all these reforms are adopted, the new SGP would at most be a second best solution. The real missing element is an area-wide fiscal policy actor capable of interacting with the ECB, so as to assure an efficient policy-mix. Even if this solution is not conceivable in the present political setting, it may be considered as a benchmark to foster both more coordination inside the European council and more reactivity (i.e. more growth responsibility) from its part.

Fiscal policy in the euro area, the US and the UK: an overview

The Stability and Growth Pact (SGP) is under attack from an increasing number of economists and policy makers. As was easily predictable since its inception, in 1997, all the flaws of the SGP emerged once the European economy started to lose speed. The prolonged stagnation, that lasts since the end of 2000 has been faced by European policy makers with the hands tied. A look at the data reported in table 1 is striking in this respect: The US authorities reacted to the slowdown with a strong expansionary fiscal policy: From 2001 to 2002 the fiscal balance went from a surplus of 0.4% of GDP, to a deficit of 3.3%. This corresponds to a fiscal impulse of 3 points of GDP. In the same year Europe remained substantially inertial, with a policy stance that was almost neutral (to become slightly restrictive in 2003). One of the reasons for this policy inertia (that to a lesser extent also concerned monetary policy) is the constraint imposed on deficit spending by the Stability Pact. In fact, it is striking that the Euro zone has in 2003 a lower deficit than both the US and the UK, in spite of a much lower growth performance. Had Europe had comparable growth rates, we would probably observe much larger differences in measured deficits. In other words it appear as evident that, regardless of the structural differences in their economies, the fiscal policy of the US and the European Union differed substantially in facing the slowdown, with the former being far more proactive.

On some flaws of the stability and growth pact 1

On these two facts -Europe was more inertial than the United States, and the Stability Pact is at least partly responsible for this -there is a widespread consensus among economists. Similarly, there is a substantial consensus on the flaws of the Stability Pact, in its actual formulation, that may be summarized in a few lines.

-First, it lacks flexibility; the SGP imposes excessive uniformity of rules, between mature and catching-up countries, or between small and large countries regardless of the rate and variability of growth, of the degree of openness, of investment needs, of contingent liabilities and of the sustainability of public finances. -Second, it is asymmetric, providing no incentive to reduce expenses or to increase revenues during periods of strong growth. -Third, it disregards the public spending intertemporal features, imposing year by year targets even when returns (e.g. of investment) are spread over long time periods. Paradoxically enough it is for this reason inimical to structural reforms which generally imply short term costs and permanent reduction in future spending. -Fourth, it neglects the long term sustainability of public finances, by focusing on deficit rather than debt.

The academic community is far from reaching an agreement on the effects of fiscal policy in a monetary union, and on the need to restrain for example by means of a stability pact. The theoretical debate develops along two lines. The first is the general one on the Keynesian vs. Non-Keynesian effects of fiscal consolidations. Starting from the early 1990s a growing body of literature has argued in favor of expansionary effects of fiscal consolidations that would overcome the standard Keynesian contractionary effects. The bottom line of the argument is that a credible and permanent reduction of budget deficits may have beneficial effects on private sector expectations, and hence induce an increase of private expenditure (be it consumption or investment). In a nutshell, a fiscal consolidation may, under certain conditions, crowd in private expenditure and possibly more than compensate the direct negative effect of public spending reductions predicted by the standard Keynesian argument.

More specifically targeted to monetary Unions, but equally polarized, is the debate on spillover effects. On one side, some argue that a government running a budget deficit has to borrow; in a monetary union this is supposed to raise the common interest rate, and to have adverse effects both on public expenditure (the area-wide increased interest payments reduce government consumption and investment possibilities), and on private consumption and investment in the other countries. This negative externality would induce national governments to run excessive budget deficits, allowing them to make the other countries pay part of `the bill'. An opposite externality argument can be invoked. Suppose a budget deficit expansion occurred in one country. If this were unwarranted, it would result in inflationary pressure, and hence in reduced competitiveness. On the other hand, if the deficit responded to a slump in production it would sustain demand and hence income and imports. In both cases, demand for the other countries' production would increase, and their deficit (thanks to increased fiscal revenues) would be reduced.

For both debates, models with one of the two effects prevailing may be easily constructed, so that the answer has to be found in empirical analysis. Unfortunately, evidence on the expansionary effect of fiscal consolidation is inconclusive as well. The Non Keynesian episodes of fiscal contraction are not very numerous, and often associated with specific factors that may have driven the result. For example, they almost always concern small open economies, for which the public expenditure multiplier was small (i.e. the Keynesian effects limited), but the competitive effect very strong. More on this in the following argument. Similarly, a clear-cut response on the sign of the externality has yet to be given.

Thus, it appears clear that the case for a Stability Pact is all but established in the empirical and in the theoretical literature alike.

The Pact has another shortcoming, linked to its one size fits all structure, that is becoming clearer as time goes by. In fact, the constraints on public finances imposed by the Pact play differently in large and small countries, with the former paying higher costs. A small open economy, in fact, relies more on external demand than a large one. As a consequence, budgetary restriction is less contractionary, and may actually be expansionary through fiscal competition. For large countries fiscal restraint is costlier in terms of foregone growth. It is not by chance (nor by a genetic predisposition of large country policy makers to vice and incompetence) if nowadays most virtuous countries are small, and the "bad pupils" are the four largest countries of the European Union (the three largest countries of the euro area). That means that the allegedly anti-Keynesians effects of fiscal restrictions are in actuality …. Keynesians. It is not through a virtuous increase of private internal demand that the effect works, but through the increase of external demand which represents typically two third of the GDP of a representative small economy.

A hidden agenda?

In light of the dubious theoretical and empirical support, the strenuous defense of the Pact by virtually anybody (except the governments that have to deal with their electorates) is difficult to understand. In fact, it induces to suspect that the Pact is not defended per se, but rather as a means of pushing a broader and 'hidden' agenda.

Constraining public finances, sometimes against all logic, could in fact serve the purpose of reducing the role of government in the economy. By depressing growth and employment, it would make the burden of the welfare system heavier, and thus it would make the reform look even more unavoidable and easier for the electorate to swallow.

This would explain why the Pact is not really challenged, but raises two problems. The first is that a tool that had been designed to serve as a short term policy guideline is de facto transformed in an instrument to push for long term structural modifications of the European economies. The second, more important, has to do with democracy in the economic government of Europe. Is it correct to impose to national governments policies that are systematically not validated by their electorates, in the name of an agenda that cannot be explicitly stated because it would certainly be rejected? The latest Commission forecasts on public finances development in Europe show that six countries (France, Germany, Greece, Italy, The Netherlands, Portugal, i.e. 67% and 88% of the EU15 and the Euro area total 2002 GDP at current prices, respectively2 ) are expected to pass the 3% limit imposed by the treaties.

What appears clearly, on the other hand, is that the Stability Pact is only one part of the problem, and that even scrapping it altogether would probably not be enough to revitalize economic policy making in the Euro area. The real missing element is an areawide fiscal policy actor, capable of interacting with the ECB and to assure an efficient policy mix as happens in the United States. Ideally, a central fiscal policy maker would be able to act in coordination with monetary policy to effectively manage common shocks. This would not only allow more efficient policy making; but it would also take some of the pressure off the shoulders of the ECB, that is at present the only actor supposed to act facing common shocks. By means of transfers a centralized fiscal policy would also be able to deal with region/country specific shocks (or to asymmetric effects of common shocks), exactly as national fiscal policy manage regional shocks.

Reform proposals 3

Thus, a first best solution would certainly be substituting the Pact, that was originally designed as a decentralized coordination device "from the bottom", with a fully centralized fiscal policy authority. We may even push the argument further and argue that if European integration has to proceed significantly, this solution must be the ultimate outcome of the process.

Of course the first best solution just described is not even conceivable in the present political and institutional conditions, and as such cannot be considered as a valid and realistic option for reforming the current institutional setting.

The same can be said for what I see as the second best solution, namely the abandon of the Stability Pact, and the restoration of national control on fiscal policy. Of course, the problem of how to coordinate twelve (and possibly more in the medium term) national fiscal policies remains, especially in what concerns the relationship with the ECB that is centralized and almost entirely politically unaccountable. But recognizing a problem does not necessarily imply sticking with the status quo. It is true that the Pact works as a coordination device for fiscal policies in European countries. But it is actually coordinating them on a bad equilibrium, characterized by inertia, and procyclical fiscal impulses. In these conditions, it is hard to see how the lack of coordination could perform worse. It is always better to have no coordination, than a bad coordination.

While also politically unfeasible, the solution of scrapping the Stability Pact gives a guideline for assessing the reform proposals that are actually being discussed, and that have some chances of being actually implemented. In fact, I will rank the existing proposals according to the degree to which they allow national governments to regain control of their public finances, and to use them for an active, and countercyclical fiscal policy.

I said that the Pact as it stands has three shortcomings: It prevents automatic stabilizers from acting countercyclically; it penalizes public investment, the most volatile and easily manageable item of public expenditures; it prevents poorer countries to increase public investment in order to sustain their catch-up (the problem will most probably become even more stringent when dealing with the accession countries).

The first desirable modification, on which even the Commission agrees (since November 2002), is shifting the focus from total to structural deficit, thus eliminating all the effects given by the cycle. True, the definition of structural balance relies on a controversial concept, like the output gap. But the benefit of letting automatic stabilizers play would more than compensate the loss of immediacy of the measure.

The second modification, also desirable, would be to exclude from total deficit public investment (the so called golden rule, or dual budget approach), in order to avoid that short term constraints pose problems on long term growth. The definition of what to include in the category of public investment necessarily implies a degree of arbitrariness, that risks to generate endless bargaining when discussing national stability plans. This problem, though, could be turned into an opportunity: The task of precisely defining what belongs to the category should be given to the Council, that could use it for pushing towards types of expenditure that it deems useful for enhancing growth and competitivity (R&D, new technologies, human capital formation, and so on). More than laws and directives, such a power would put in place a system of incentives and hence could push towards a real European Policy on crucial issues.

Finally, with an eye to long term sustainability, the stock of debt could be taken into account. This should be seen not so much as punishing high debt countries, but rather as rewarding low debt ones. Countries with lower-than-average debt could be given extra leeway, while for the others the 3% limit should continue to hold. After all, a high debt already limits the action of fiscal policy, by means of high interest payments. A second penalty would probably be more harmful than beneficial.

To summarize, a reformed Stability Pact should impose convergence of structural deficit net of public investment. This would assure long term soundness of public finances, leaving room for short term countercyclical policies (at least by letting automatic stabilizers operate freely), and for investment aimed at increasing potential output.

Table I : Growth, deficit and fiscal impulse

 I

		2001	2002	2003	2004
		GDP Growth Rate in %
	USA	0.3	2.2	3.1	4.5
	Euro zone	1.5	0.9	0.4	1.4
	UK	2.1	1.7	2.3	3.1
		Public Sector Balance in % Of GDP
	USA	0.4	-3.3	-4.8	-5.1
	Euro zone 1	-1.6	-2.2	-2.7	-2.7
	UK	0.9	-2.1	-3.2	-2.8
		Fiscal Impulse in % of GDP
	USA	0.6	3.0	1.7	1.1
	Euro zone	0.3	0.5	-0.2	-0.3
	UK	0.8	2.0	1.2	-0.2

1 Net of UMTS receipts Sources : Eurostat, national accounts, OFCE forecasts

Cf. Jean-Paul Fitoussi, Briefing paper n°4, November

And possibly seven if we take into account the limit case of the United Kingdom. (Data taken from the European Commission Spring forecasts, April 2004).

Cf. Jean-Paul Fitoussi and Jérôme Creel : How to reform the European reform, London, October 2002.


Cet article analyse de façon comparée les émeutes et le mouvement étudiant anti-CPE. Ces mouvements reposent tous les deux sur une mobilisation de la jeunesse, mais les dimensions les plus structurantes ne sont pas identiques. Les émeutes révèlent un sentiment de relégation et un profond ressentiment qui renvoient simultanément aux dimensions ethnoraciales et sociales. Mais elles ne se sont pas développées uniquement sur la base de l'âge et de l'appartenance sociale, elles mettent en jeu également des formes urbaines liées à la ségrégation des populations précaires immigrées ou issues de l'immigration. La ségrégation renforce l'imbrication entre toutes ces dimensions et participe d'une lecture du monde social et de sa propre expérience en termes de discrimination. Cette lecture tend à se diffuser à l'ensemble des domaines de la société.

Introduction

For three weeks a wave of riots shook more than two hundred towns in France. Beginning in the east Paris suburbs and following the deaths of two adolescents who believed they were being pursued by the police, the riots spread across the country between the end of October and the middle of November 2005. Less than six months later, a large youth movement mobilized against a new measure taken by the Dominique de Villepin government in response to the November riots-the "First Job Contract," or "Contrat Premier Embauche1 " (CPE). Strikes and blockades of universities began in February whilst the law was still under discussion in Parliament. Three quarters of French universities would be blockaded or have classes interrupted as a result of the movement. In March 2006, these blockades spread to secondary schools, over a thousand of which would be affected by collective action. Simultaneously, an intense round of demonstrations began to unfurl across the country.

In my paper I will focus more on the riots than on the student movement, using the comparison between these two social movements to reflect on social cohesion in a society which boasts of having a strong specific model of integration. In fact, the so-called "modèle d'intégration républicaine" (republican model of integration) was hardly discussed in terms of its capacity to maintain social cohesion after the riots. I will also reflect on the methodological and theoretical aspects of analyzing this kind of social movement, as well as its impact on public policies designed to enhance integration in France.

What are the main characteristics of this model? Has it ever really existed 2 ?

Essentially, this model is based on a national conception of citizenship that negates using certain criteria (such as ethnicity, race, or religion) to categorize individuals and to treat them as specific groups.

In theory, this means that the state interacts with the individual independent of these criteria, which implies equal treatment for all. This is the reason the state refuses to recognize interest groups and official public institutions that are based on these criteria. In addition, there is a restrictive conception of "laïcité" (secularism), which prohibits religious practices and identities from appearing in the public sphere and restricts them to the private sphere.

OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 2/16

School, health, and housing are classic public services that officially must not take these differences into consideration. For example, school is viewed as a basic institution with a social integration function that is supposed to guarantee equal opportunity independent of social, ethnic, and religious backgrounds.

The idea is that being French means accepting to be a part of this national "community of citizens," and in fact relegating the other dimensions of one's identity to the private sphere. This is the reason that alternative social forms of this model are rejected. It also explains why social and ethnic segregation is perceived as dangerous for social cohesion.

But this position implies guaranteeing equal opportunity independently of where one lives spatially.

For a long time, even though it was not true, the State claimed to guarantee a relative homogeneity of the conditions required to maintain social integration and equality of opportunity for all.

Historical and economical conditions made this model of "republican integration" more or less efficient. Despite war and conflict related to decolonization, the period of the "Trente glorieuses" (1945-1975) following the Second World War was a sort of "golden age" for this model: economic growth; expansion of the welfare state; belief in progress; strong political and trade union representation of the working class; and high upward social mobility all favored strong social integration. While conflict and violence accompanied the integration of early-and mid-20 th century European immigrants, the next generation-the "baby boomers" whose children were born in France-took advantage of this period. Not only were they able to become French, but they were also integrated at school and work. Thus, theirs was an experience of social mobility. If segregation, stigmatization, and discrimination had plagued their parents, they themselves were less affected.

I don't want to emphasize a sharply contrasted opposition between the "Trente glorieuses" and the most recent period of the crisis that began in the 1970s. This model has always been an ideal type that was never completely realized. However, conditions such as economic growth, the belief in a better future, and a strong working class movement gave it more consistency and credibility. Labor shortages created by the reconstruction and modernization of France provoked the arrival of the first immigrant generations to come from the former colonies, in particular from North Africa. This first wave of immigrants, which was mainly composed of men, arrived intending to return home. They were crammed into slums and bore the full weight of rejection by French society, which was bogged down in the Algerian war and other conflicts linked with decolonization. The social conditions of these immigrants, such as work and housing, were very difficult. Moreover, their position as "foreigners" from former colonies meant they were regarded as second-class citizens. The first generation's experience of humiliation and exploitation is part of a collective memory that is still prevalent in the third generation. (racism) based on their African backgrounds and the situation of social fragility that both they and their parents share. In some cases, the appeal of Islam or violence becomes a way for them to express their discontent and reclaim their ill-treated dignity and identity.

The autumn 2005 riots and the spring 2006 student movement: complex processes… which implies a complex framework

The succession of these two movements in the span of three months has provoked some rash comparisons.

The way in which the socio-spatial exclusion of low-income families is linked to the increasing precariousness of young people merits meticulous analysis.

In their interpretations of these urban riots, most foreign media focused on the question of multiculturalism and the role of Islam in France. Some newspapers went so far as to compare these events to those of Los Angeles in 1992, thus promoting an overly-racialized interpretation of the riots. Others didn't hesitate to stigmatize Muslims as being "hostile to the rules and customs of Western countries." The difficulty French society has with integrating Muslim immigrant populations-or even its inability to do so-was thus surreptitiously highlighted. By extension, the challenge that multiculturalism poses for France would appear to come down to this religious aspect, that of the difficulty Islam would have in finding its place in a society characterized both by the pervasiveness of Christianity and a secular political culture. Better-informed foreign commentators viewed these events as a revolt of the most deprived groups, made of people who are immersed in deep social despair and faced with a waning "French

Republican Model" that has demonstrated its inability to recognize other identities, to cooperate with them, and to assure a high level of integration. While all of these factors should be taken into account, the November riots and the social tensions they revealed must not be reduced to questions of multiculturalism or religion alone. Rather, it is precisely the overlap of these questions with the "social question" that creates its complexity. Periods of protest, especially when they take violent forms, tend to give a unified picture of the participants. So it was for the riots in November 2005, which were interpreted not only as a violent response to the insulting comments of a Minister and the death of two young people, but also as a general expression of the relegation and disqualification felt by the youth in these underprivileged areas. To understand these events, we must take into account numerous factors. Not all underprivileged areas were affected by the riots; many young people not living in social housing and less affected by racial discrimination were not heavily involved. These riots were indeed the expression of relegation and a profound resentment that have brought into play both ethno-racial (youth of African immigrant background, directly affected by discrimination and racism) and social dimensions (youth of low-income background). Emphasizing these aspects does not mean denying the increasing precariousness of young people in general, nor does it mean neglecting the growing intergenerational employment inequalities and lack of upward social mobility. Rather, it allows us to demonstrate that the riots did not develop simply on the basis of age and class, but that they bring into play the urban forms of the increasing precariousness of part of the low-income population-particularly those of immigrant origin.

The protest movement in response to the CPE revealed this same tension between two main elements: a general reaction to a government plan perceived to be a reinforcement of the fragility and precariousness of working conditions for young people on one hand; and internal stratification stemming from social and educational inequalities during the long period between adolescence and employment on the other. This is exacerbated by the fact that, in terms of its recruitment program and the performance of degrees in the labor market, the French school system pits prestigious universities (the famous "grandes écoles") against non-selective "mass" universities.

Why compare the riots to the student movement?

The occurrence of two large mobilizations of French youth in a short period of time allows us to not only highlight the fundamental differences at the heart of the two respective groups (which reveals two different forms of collective action); it also allows us to identify the factors and dynamics at work in each case.

The different dimensions indicated below in Graph 1 enable us to better comprehend the greater complexity of the riots relative to the anti-CPE student movement. In effect, the events of November 2005

are not reducible to one dimension alone, whether it is social, ethnic, spatial or political. It is precisely the intermingling of all of the factors listed below that explains much of the intensity of the riots, along with their territorial diffusion, their weak politicization, and the profile of the youth involved. the anti-CPE movement appears to be a classic student demonstration, similar in both its form and its demands to the protests against various government bills proposed between 1980 and 1990.

RIOTS

Graph 1

Comments: Graph 1 shows which social dimensions were important in structuring and explaining the two social movements. The thicker the line is, the more important the factor is.

Above all, Graph 1 allows us to understand that the same dimension can play an important role in both contexts while having different content. Moreover, we see that it is possible for some factors that are particularly important in one case to play only a minor role in the other. This is especially true for the ethno-racial and spatial aspects, which played decisive roles in the riots but were of merely secondary importance in the structuring of the student movement against the CPE.

Besides the universally-important generational aspect, only two dimensions (social background and political organization/representation) played a deciding role in both movements. However, they differ radically in their content. Most of the youth that were implicated in the riots were of working-class background, with parents who were either unemployed or who were beneficiaries of minimum income OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 6/16 support. By contrast, most of the youth who mobilized against the CPE were either from the stable minority of the working class or from the lower-middle class.

As for the political dimensions, the differences between the two events are not only prominent; they reveal thoroughly the difficulty that the political and trade union systems have in effectively representing the interests and expectations of young people living in working-class areas. If from the beginning the student mobilization was able to profit simultaneously from the involvement of, and the taking of more radical positions on the part of, political parties and trades union; it was reserve, hesitation, and suspicion that characterized their reaction to the riots. It was especially in the communities that were most affected by the riots that political representatives on both the right and the left were heavily mobilized, often supported by active networks of associations and local spontaneous demonstrations. At the national level on the other hand, in addition to the police response orchestrated by the Minister of the Interior, the engagement of the political parties and of the trades union remained moderate in the face of the scope and duration of the riots. Few overall interpretations proposed by major politicians have sought to give a political sense to the riots, or to translate differently the revolt of the underprivileged youth who live in areas of relegation. In this sense, we can say that the political response to the riots was mostly repressive and penal.

The difference is flagrant when we compare the rapidity of the mobilization with the political support from which the students were able benefit. Certainly, the politicization of this category of young people has been institutionalized for quite some time. This is especially true in France where, despite a continual drop in electoral participation of its representatives, the tradition of the student syndicate remains a structuring element of university political life. It remains an easily-accessible resource in the event of a social movement, whose public demonstrations always have numerous implications for the political and national trade union systems.

The ethno-racial and spatial dimensions, which were of minimal importance in the structuring of the student mobilization, played a determining role in that of the riots-thus accounting for many of its particularities. The first factor intervened in two ways. First, it served as an easily-accessible method for the youth to explain the behavior of the police towards the adolescents they were pursuing, who ended up accessing a forbidden zone and dying of burns from a voltage transformer. Numerous authors have shown how the relationship between working-class area youth and the police has degraded in the last twenty years. They have also shown how this relationship is increasingly based on a philosophy of physical confrontation and provocations during which the recourse to violence becomes banal. The strong presence of youth of immigrant background contributes heavily to the "ethnicization" of police intervention, which these young people experience as racial profiling-making these North African or black African youth the OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 7/16 target of choice for law enforcement agents. Thus, the death of the two adolescents was interpreted as the dramatic consequence of ethno-racial discrimination, a recurrent theme in the lives of youth of immigrant background. The explosion of violence that followed the announcement of their death equaled the resentment of working-class youth that share the experience of ethno-racial stigmatization.

The ethno-racial dimension also intervened, for reasons mentioned in the preceding paragraph, simply because a significant part of the youth who were directly implicated in the riots were of immigrant background. Moreover, this element insidiously led certain commentators and mass media (principally foreign) to present the events of November 2005 as "ethnic" riots. But if it is true that a majority of the implicated youth were of immigrant background, in no instance were the actions organized on an "ethnic" basis-just as the violence was at no moment aimed at a specific ethno-racial group. This is a major difference with the 1992 Los Angeles riots, during which the violence put ethno-racial groups in opposition to each other, with logics of territorial control playing an important role. This dimension did not play an equivalent role in the emergence and development of the student movement; it manifested itself ephemerally during certain incidents towards the end of the protests, throughout the course of which limited and isolated groups of non-students (a majority of whom were black) attacked some protesters.

These events, which contributed to the attacks and the looting that took place during the protests, were able to sow discord in the unity of the university and high-school movement without ever making the ethno-racial difference a dividing line. This is even more noticeable on the social and academic levels, between high-school students engaged in the curricula of general education (often of middle-class origin) and those who are engaged in vocational education (whose degrees are more often devalued and significantly less favored). This cleavage has sometimes taken the form of opposition towards vocational education at the high-school level in working-class areas and towards general education in the most privileged areas, with the first group summoning a section of the youth implicated in the riots. In this way, some protests have taken place in certain "bourgeois" high-schools, which lead to violence and the destruction of property.

The spatial dimension is easier to analyze by comparing the two events because it is woven intimately into the logic of the diffusion of the riots, whereas it appears marginal in the other case. The geography of the riots clearly demonstrates the particularity of the neighborhoods concerned: a majority of the areas affected were among the most working-class and precarious neighborhoods, with a strong presence of immigrants or people of immigrant background. These neighborhoods are also considered "sensitive" by urban policy, and it is common to find deteriorating public housing in such areas. We will see in the following section how the level of segregation in these neighborhoods has helped to transform the conception of the social world from one that is thought of in terms of inequality to one that is OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 8/16 conceived in terms of discrimination. The situation of stigmatization and segregation has contributed to the consolidation of a "community of destinies" (that is, one of "pariahs") among young people. The territorial dimension also played a determining role because the most intense conflicts with the police, as well as the most flagrant civil rights abuses, took place in specific areas (either inside or on the immediate frontier of blocks of Public Housing Projects). Intimate knowledge of these spaces gave a strategic advantage to the youth, who were operating on terrain that was difficult for the police to control. The "urban guerilla warfare" quality of certain violent episodes is explained by the specific territorial configuration of such large public housing projects, which function like territorial units that are difficult to penetrate and control.

Territorial aspects were of only secondary importance for the student movement. We note that just as with other mobilizations during the 1990s, middle-sized provincial university towns are often the first to mobilize on a large scale, with the size and influence of the student body in local life being conducive to this type of demonstration. These are also universities at the heart of which the mass curricula are the most numerous and where, by extension, the uncertainty as to the value of their diplomas is the most elevated.

Finally, two dimensions which are represented by dotted lines in the case of the riots (familial structure and gender) are absent in that of the anti-CPE student movement. The choice to make them appear dotted here consists of two elements. The few facts available and the observations made at the moment of the riots have clearly shown that a majority of the rioters were young men; the charges that were filed and information obtained during police interviews confirm this. On the other hand, few works have sought to thoroughly examine this question, even if classic explanations could help explain why the young men's most intense involvement was in violent actions against the police.

We also notice that a significant part of the youth implicated in the riots came from families of three or more children, usually residing in single-parent households. Living in this situation appears to increase the likelihood that a young man will be involved in conflicts with the police. This leads us to distinguish two ideal types:

1 For the riots: young male of working class or underprivileged origin and of African immigrant background; living with a large family and in a very depressed public housing project; low educational level and no direct connection with political and trade union organizations.

2 Student movement: either male or female attending university and of middle-or lower-middle class origin; no specific residential or ethnic characteristics; well-connected to collective action and to formal or informal political organization.

Segregation and Discrimination

From the 1990s onwards, the notion of discrimination became a major issue in the political and institutional arenas, in common discourse, and in the social sciences. This process has been accompanied by the creation of institutions, such as the High Authority for the Fight Against Discrimination and for Equality (la HALDE). 3 Although this organization aims to counteract all forms of discrimination, special attention is paid to offenses of ethnic or racial character due to the tendency of French society to not give them high priority and to not devote enough resources to their legal and statistical pursuit. Far more than just a realization of the necessity to identify, measure, and eliminate ethno-racial discrimination, this trend refers to the transition from an idea of society conceived in terms of class and social inequality to one founded on the dimensions of ethnicity and discrimination.

While numerous sociologists have pointed out this process, many of them have failed to give segregation a deciding role in their analyses. This has certainly helped reinforce the paradigm of the transition mentioned above-that is, the shift towards a society in which ethno-cultural (ethno-racial) identities, and the discrimination they imply, take precedence. Unequal access to housing, employment, and healthcare services, as well as unequal treatment by the police and in jails, thus tends to be analyzed primarily in terms of ethnic or racial discrimination.

We must clarify the more general link with segregation, as it is the subject that is most often approached in reference to a specific urban configuration: that of working-class areas with a high concentration of first-or second-generation immigrants. A more general analysis of urban segregation implies taking into account all of the logics of socio-spatial differentiation that contribute to the intentional practice of grouping together by common characteristics. Logically, this leads us to reflect on the relationship between segregation and discrimination in other types of urban spaces.

The principal difference between privileged areas and those that are distinctly disadvantaged and stigmatized is that the first group is able to participate in the process-directly or indirectly, intentionally or otherwise-of the relegation of the second group, while this extreme segregation does not make the inhabitants of well-to-do neighborhoods victims of discrimination. In the case of underprivileged workingclass neighborhoods on the other hand, segregation is accompanied by a diffusion/concentration of the 3 La Haute Autorité de Lutte contre les Discriminations et pour l'Égalité (HALDE) is an administrative authority that was created in December 2004. "Our general mission is as follows: to combat discrimination as prohibited by law; to provide all necessary information; to accompany the victims; and to identify and promote just practices in order to introduce the principle of equality to conventional wisdom. We retain the legal right to conduct investigations concerning such matters." (http://www.halde.fr) OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 10/16 concrete experience of discrimination, which consolidates and amplifies an interpretation of the world in reference to this logic.

For this reason, we will focus on this specific type of urban space, which was at the center of the November 2005 riots. Apart from the initial incident that triggered them, these riots can be interpreted as the violent manifestation of profound resentment in the face of a situation that was perceived to be the result of deliberately discriminatory treatment of certain categories and spaces. The intensity of this resentment can only be understood when put in comparison with other categories and spaces.

It is in the way that people perceive but also are perceived that the situation is interpreted in terms of discrimination. This is why the feeling of being a victim of discrimination can affect other categories and other better-off areas, simply stemming from the judgment of being intentionally deprived of certain opportunities or resources. Evidently the nature, intensity, and effects of such discrimination are in no way comparable to those that affect the population of the most disadvantaged neighborhoods. Often, the ethnoracial characteristics of the inhabitants of these areas provide the basis for principal discrimination and the most profound inequalities.

If the link between segregation and discrimination appears to be particularly tenuous for this specific socio-urban configuration, it may not, however, be only reduced to ethno-racial aspects. Thus, it is necessary to specify the nature of this link and its dynamics. This allows us to understand why, in this context, urban segregation acts on school segregation not only in quantitative terms (e.g., highest concentration of underprivileged students), but also in qualitative terms, favoring an interpretation of academic difficulty and failure as the result of deliberately discriminatory treatment on the part of the academic establishment and its personnel (Oberti 2007) Thus we witness, on the part of the youth themselves, a more diffuse recourse to discrimination to explain their situation of difficulty or failure, for which the intentionality of discrimination tends to prevail over the structural and/or personal elements of maladjustment/dysfunction4 . Such logic reappears when we consider the difficulties that youth in these areas have in finding employment (Kakpo 2007). Very few sociological works focus on the custom of denouncing discrimination as a way of masking one's own dysfunctions/maladjustments (at work, at school, etc.) by diverting them to social determinations (such as unacknowledged or bottled up inequality, for example). Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion

11/16

This way of thinking implies that we must first distinguish inequality from discrimination. We will thus speak of inequality as the result of a structural, unintentional process that translates into unequal access to resources and social positions according to classic sociological factors such as: social origin; level of education; ethno-racial dimensions; location of residence; age; gender; and family structure. By contrast, discrimination refers to an intentional process of differentiated and unfavorable treatment of an individual or of a group based on one or several characteristics. The intentionality of this unfavorable treatment is perceived as such by individuals who are affected by it. This point is complex and important because inequality can result from a deliberate process of "putting aside" certain groups without necessarily aiming for them to be treated in an unfavorable manner. This process reveals what is commonly referred to as "perverse effects" in sociology, which is a phrase used to describe an action that has unintended consequences. In some cases, the outcome may even be contrary to the actor's intentions.

For example, parents may very well desire to avoid establishments with a strong presence of children of immigrant origin without, however, hoping to accord unfavorable treatment to such people in terms of educational conditions or breath of curriculum. Neither the protagonists of this "avoidance" nor the people stigmatized by it perceive such behavior as discrimination. What is important in the definition retained here is the individual's subjective perception of a situation that he or she will interpret as the result of a deliberate action seeking to accord to them unfavorable treatment on the basis of one or several characteristics. If stigmatization often implies discrimination, the link is neither mechanical nor systematic.

Thus, discrimination is composed of a profound subjective dimension. However, pronounced inequality is not necessarily interpreted in terms of discrimination, just as real discrimination is not necessarily perceived as such by those concerned. It is indeed the combination of these two aspects-their intentional character on one hand, and the perception of this intentionality by the affected people on the other hand-that generally constitutes the point of departure for revolts or large-scale mobilizations (especially when discrimination scoffs at the laws and rules currently in force).

The diagram below lays out the overall scope of our analysis:

12/16

Consolidates inequalities through the accrued entanglement and superimposition of the different spheres and domains concerned.

Favors an overall interpretation in terms of discrimination, thus emphasizing the intentionality of unfavorable treatment. The analytical dimensions indicated above (social origin, level of education, ethnicity/race, location of residence, age, gender, familial structure) correspond to the domains that are typically linked to the production of inequality. They all played a role in the structuring and development of the riots.

Domains of Social Organization

However, two factors merit special consideration:

1 These dimensions do not necessarily act on the production of inequality with the same intensity or according to the same logic. Likewise, their multiple combinations give rise to complex interpretations.

2 Depending on the category in question (education, housing, security, employment, political representation), each dimension will have varying structural effects on social inequality. Consequently, the extent to which they are perceived as discrimination will differ. In other words, certain factors are more linked to an interpretation in terms of inequality, while others are more linked to an interpretation in terms of discrimination. For example, social class is more commonly associated with inequality than with discrimination, whereas the inverse is true for ethnicity and gender.

Examining a few examples will help us better understand this dynamic.

For quite some time now, sociologists have brought to the fore educational inequality linked to social origin. The social actors themselves most often perceive this situation as the result of an unintentional process on the part of individuals or institutions; they tend to attribute it to the unequal endowment of economic and cultural capital, which manifests itself as disproportionate access to knowledge and an unequal relationship with the modes of academic evaluation. Their feeling is that it is not a deliberate intention of the institution or of specific groups to discriminate against people on the basis of social class in granting them access to education and academic degrees. Thus, they do not make an initial interpretation in terms of discrimination.

The logic behind educational inequality that is linked to ethno-racial dimensions is different in France. Not only has the perception of the academic failure and relegation of some immigrant children been experienced and interpreted as resulting simultaneously from inequality and discrimination (of deliberate intentions and differentiated treatment); the tendency has also been to stress a discriminatory vision of school and its verdicts.

However, in areas such as law enforcement, housing, or even employment, ethno-racial discrimination appears to be determinant and is often experienced as such. Concrete and ordinary experiences with racism contribute to their construction as discrimination rather than as inequality, and OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 14/16 bring to the foreground ethno-racial aspects as the main source of discrimination. Sources linked to social background, gender, and neighborhood are thus diluted, whereas it is precisely urban segregation in the most disadvantaged areas that produces an original intermixing-which is liable to amplify discrimination. In effect, those that are linked to the ethno-racial dimensions find themselves intimately linked to those referring to other criteria, such as age, gender, and location of residence.

In this way, we better understand how each dimension acts differently on various areas of society.

Urban segregation in disadvantaged working-class areas is at the very heart of this process, acting in three separate ways: first of all, it reinforces the association and intermingling of dimensions (such as class, ethnicity/race, age, gender, neighborhood, etc.) that are less spontaneously correlated in instances during which there is less segregation based on these elements. 5 Secondly, it also tends to durably associate some situations and behaviors with certain social categories and specific ethnic groups to such an extent that these characteristics become unique to these groups, who end up being principally perceived and defined in reference to these phenomena. In this way, a significant number of youth of immigrant background in a school is most likely to be perceived as a factor of disorder, or as reducing the quality of academic instruction; just as their presence in a public place will be perceived as a potential factor of insecurity. To the extent that the segregated groups in these neighborhoods are already the most stigmatized, the visibility of their concentration reinforces this stigmatization and a homogenized vision of such groups. This is how violence, delinquency, incivility, academic failure, and so on are less related to the social contexts that generate them than they are to the stigmatized groups themselves.

Finally, it favors the transition from the logic of inequality to the logic of discrimination; in other words, it tends to transform one's outlook on society and on one's own situation from a perception that is conceived in terms of inequality to one that is thought of in terms of discrimination. It is not a question of rupture, but rather of a gradual shift that does not completely erase the vision conceived in terms of inequality.

This transformation is particularly noticeable in the educational sphere. The social and ethnic homogeneity of certain establishments, which are associated with a less-diversified and less-attractive curriculum, is no longer just perceived as resulting from social inequality (which is more "legitimate" and therefore more easily-accepted). Above all, it is perceived as the result of an intentional process of exclusion and of differentiated, unfavorable treatment based on characteristics of which the strong spatial OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 15/16 concentration amplifies the stigmatization and visibility. 6 This works in favor of the dissemination of the logic of discrimination-which is traditionally associated with certain dimensions (mainly ethnicity/race and gender) and with certain domains (law enforcement, housing, and employment)-to the entire society. 7 This includes school, whose verdicts appear to be increasingly perceived as discrimination. 8 The situation of areas with a strong presence of working-class citizens and of immigrants from North and Sub-Saharan Africa provides a good example of this double process. The multiple factors that produce inequality in these areas are heavily interwoven. The image of the young man who is poorly educated, of working-class and immigrant background, and living in a housing project, incarnates these consolidated characteristics that can not only reinforce their own capacity to amplify inequality, but also promote their perception as discrimination. They cannot, however, be reduced to simply ethno-racial aspects. In this way, young men in these areas perceive actions taken by law enforcement agents as discriminatory actions, the basis of which is the young men's identification not only with a certain ethnoracial group, but also with a neighborhood, a gender, and a social class. 9 In this context, urban segregation contributes to the transformation of a personal experience into collective experience.

Last but not least, going back to the second graph, we understand that the French riots were not an ethnic conflict. Of course, the experience of ethnic and racial discrimination was a crucial aspect in producing hatred and deep resentment. But the revolt was never a clash between ethnic groups, and the movement was not organized on the basis of specific ethnic interests. In the same way, it was not only a class revolt. Segregation was the element that created a specific and favorable context for the riots by transforming inequalities into visible and intolerable discrimination. More than a wish of ethnic selforganization or community division, it was a strong request for state intervention in order to reclaim dignity and achieve equal opportunity. It also raised the question of political representation of working 6 This is why urban segregation contributes to the dilution of the effects of each factor, acting simultaneously as an objective element and subjective dimension of discrimination. Comparative studies run on areas that sharply contrast with each other in respect to their social and urban profiles would allow us to more subtly understand the experience of discrimination according to the level and type of segregation, as well as the way in which discrimination is associated with certain factors. 7 Of course, this has played a large role in explaining the scope of France's November 2005 urban riots (Lagrange and Oberti (Eds), 2006). 8 I was able to fully comprehend the intensity of this process during a public conference where I tried to present the difference between inequality and discrimination using school as a counter-example to a deliberately discriminatory institution. Several spectators, who were relatively young and of North African or Sub-Saharan African background, raised their voices in opposition to this concept. They portrayed their own academic orientation as the deliberate choice of professors and academic advisors to relegate them to the least-valued curricula because of their immigrant roots. 9 Some rap lyrics, in covering the theme of the ghetto, demonstrate the multidimensional aspect of the perception of discrimination and its effects on the amplification of "rage."

  OSC -Notes & Documents N° 2007-02Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion3/16During the 70s and the 80s, the possibility of returning to one's country of origin diminished. The definitive settling of these immigrants created the "regroupement familial" (reunification of the family in France as a justification for residence there). It also brought the arrival of the second generation, which was born and socialized in France. Unlike early 20 th century European immigrants, these secondgeneration North Africans are penalized not only by a sluggish economy, but also because of their ethnoracial characteristics. The gap between what the French republican model implies-meritocracy, rights, citizenship-and the actual situation is one of the major causes of the frustration and resentment felt by these young French people. Theirs is an experience of stigmatization, segregation, and discrimination

  OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 4/16

  By comparison, OSC -Notes & Documents N° 2007-02 Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 5/16

  OSC -Notes & Documents N° 2007-02Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 9/16

  OSC -Notes & Documents N° 2007-02Marco Oberti -The French republican model of integration: the theory of cohesion and the practice of exclusion 13/16

Job contract for young people under

years which gives the possibility of laying of the person without justification during a period of time of two years. 2 This part takes up again arguments which were presented in Lagrange and Oberti (Eds), 2006.

This marks an evolution from what François Dubet highlighted in his work on "the hassle" (la galère), in which he demonstrated how some youth living in public housing attributed the difficulties they had at school or in integrating themselves into society to "personal" weaknesses or shortcomings(Dubet 1987).

This has already been revealed by[START_REF] Duprez | Entre discrimination et désaffiliation. L'expérience des jeunes issus de l'immigration maghrébine[END_REF]


EUROPEAN PARLIAMENT COMMITTEE FOR ECONOMIC AND MONETARY AFFAIRS

Briefing paper n° 3 -29 August 2003

Can aggregate demand be boosted in the euro area and how?

Jean-Paul Fitoussi

Executive Summary

The large (and increasing) output gap that characterizes the euro area suggests that aggregate demand can physically be boosted. Only fiscal policy could fulfil this task though, being monetary policy at the limit, and structural reforms linked to long term growth. The usual arguments against the use of discretionary fiscal policy do not seem to apply in this moment: it is unlikely that in a situation of excess saving and low inflation, government borrowing would cause interest rates to growth hampering medium term growth. On the contrary, fiscal policy has a crucial role in facilitating coordination of the private sector on a high growth equilibrium; a role that now it is not fulfilling. Though potentially beneficial for sustaining aggregate demand and facilitating the recovery, fiscal policy is constrained by the Stability pact. If governments want to act, they should hence temporarily and conditionally suspend the pact, even if coordination of policies should be maintained. If discretionary fiscal policy could be implemented, the most effective measures for short term effects would be temporary tax cuts, infrastructure investment in projects readily implemented, and an increase of expenditure on social capital (health, dependency, higher education, urban renovation, R&D) There is a broad consensus about the existence of a deficiency of aggregate demand in the euro area since 2001, and according to the most optimistic forecasts, this deficiency would persist until 2005. According to main estimates (OECD and IMF), the output gap will reach a figure between 2 and 3% at the end of 2003 (taking into account the downward revision of growth forecasts for 2003 since both organisations have published their outlook), that is a level comparable if not higher to the one which has characterised the european recession of 1992/93. And absent massive surprise, it is likely that this output gap will widen in 2004 (see table 1 and figure 1). Euro Zone 0,5 0,8 0,6 0,7 0,8 0,3 -0,1 -0,7 -0,8 -0

,9 -1,2 -1,6 -2,1 -2,4 -2,7 -2,8 USA 2,4 2,8 2,1 1,5 0,6 -0,6 -1,4 -1,5 -1,0 -1,4 -1,1 -1,5 -1,9 -1,9 -1,3 -1,3
Similarly, the utilization rate of productive capacity has remarkably decreased since the first quarter of 2001. Excess capacity and sub-potential growth should normally open a window of opportunity for expansionary public policies. In other words aggregate demands can "physically" be boosted in the euro area. But can it effectively be done? What instruments are today available to European policy makers to increase aggregate demand? And is it worth using them?

The Pros and Cons of Active Policies

As for the question of what tools could today allow to boost short term growth, monetary policy does not have a wide margin: In a situation of low and (most likely decreasing) rate of inflation and low nominal interest rates, the room for manoeuvre for monetary policy is limited. The ECB may (and should) cut rates further but that will most probably not lead to a sizeable decrease of the real interest rate. Furthermore the effects would be uneven across countries1 . On the other hand, the much invoked structural reforms would only have medium-to-long run effects and thus are offering no way out to the present slowdown.

The burden of tackling the slowdown, and of trying to close the output gap, would hence have to fall on the shoulders of fiscal policy. Leaving for the moment aside the constraints imposed by the actual set of rules (the Stability pact) on fiscal policy, we have to ask: is it wise, and is it worthwhile to use fiscal policy for boosting demand at this moment? In the current debate we can isolate two arguments against discretionary policy. The first is the common wisdom on fiscal discipline, well summarized by the recent Sapir report2 : Fiscal discipline reinforces medium term growth, and hence breaking it would hamper growth prospects. Growing deficits would bring about increasing interest rates and crowd out private expenditure, especially for investment. In such a perspective, the short term gains in terms of demand increases would be more than compensated by the long term costs. This textbook argument is reinforced by a consideration specific to Europe, namely the risk of a loss of credibility of the ECB, that would be forced to accommodate fiscal indiscipline. Even if we disregarded this argument, we would have a second problem. In fact, one could argue, the slowdown phase has been lasting for about three years; we could then wonder whether intervening that late would be useful and effective. After all, one might think that the longest the slowdown phase, the closer the recovery. Especially considering that the US seems to be starting to grow again, assuming again the role of locomotive they had in the past.

These arguments can both be dismissed. The output gap and the excess capacity documented earlier on, clearly show that Europe in this moment is characterized by a situation of excess saving: As a consequence it is implausible that budget deficits and government borrowing would cause interest rates to increase, crowding out private investment. This is all the more true if we consider that stock prices are depressed and the inflation rate is extremely low. As for the "it is too late" argument, we can't be assured that recovery in the US would be strong enough to drag Europe (rather, the consensus is for at least another year of weak growth in the euro area, irrespective of what the US will do); and in any case it does not seem a wise attitude to wait for others to solve our problems.

European Rules and Coordination

Thus, I believe that fiscal policy could and should be used to contrast the present slowdown; it is neither too late, nor too dangerous for future growth. But fiscal policy under the present set of rules is constrained, and does not seem to have room of manoeuvre. In fact, growing public deficits have already prompted the European Commission to threaten to start excessive deficit procedures against the largest countries of the euro area, putting their governments under pressure. The debate around the Stability pact, the calls to amend it, and the proposals of the Commission that guarantee a flexible interpretation of the rules governing budget deficits, are in fact of limited relief as the pressure towards formally sound public finance becomes embedded in governments behaviour. Even by adopting the most flexible interpretation of the Stability pact it is impossible, in the present situation, to design a discretionary fiscal policy aimed at boosting demand. The maximum that can be envisaged is the full deployment of automatic stabilizers, which is far from enough.

Thus, the existing rules prevent the utilisation of the only tool, fiscal policy, that would be desirable (and feasible) to use to contrast the slowdown and accelerate recovery. Unless we modify our definition of "sound public finance" and allow for a government to take action without feeling guilty (demagogic or irresponsible). What is at stake here is the credibility of fiscal policies. The game played between national fiscal authorities and the European Commission -over estimation of the rate of growth, creative accounting, threat of sanctions --lead most of the times to opacity of policy and of communication. It becomes increasingly difficult for the private sector to decipher the direction of fiscal policy: is it expansionary, neutral or restrictive? And even when they succeed in understanding the content of future fiscal policy, agents will have only faint confidence about its implementation. An early warning from the Commission, or worse the triggering of an excessive deficit procedure, may lead the government to change the course of fiscal policy. In such a setting, the policy loses its announcement effect and cannot serve as an anchor for expectations.

In principle macroeconomic stability may be consistent with two types of equilibrium: a low investment-low growth equilibrium and a high investment-high growth one. Which one of these equilibria will be selected depends on the expectations that the private sector holds about future conditions for business; and among the determinants of these conditions we have to include the ability of public policy to react to shocks. It is then not difficult to understand that the low equilibrium will be a likely outcome if the private sector believes that the government will cushion only positive demand shocks to avoid their inflationary consequences, and will be prevented from reacting to negative ones because of the arithmetic of public deficits and debt. Private behaviours will adapt to a lower growth path.

The reason is that public policies are not geared to enhance coordination of private sector plans. The main role for fiscal policy is in fact, through demand management, to help the economy coordinate on a "good" equilibrium. It is hard to imagine that, especially in exceptional circumstances like the present ones 3 , a strong and transparent countercyclical fiscal policy, even if financed by borrowing, would be more disruptive of private expectations than the current inertia coupled with daily bargaining about decimals of GDP with the Commission and opaque behaviours.

To sum up, we observe a situation in which public intervention to sustain economic activity and reverse the slowdown would be feasible and desirable. The current set of rules prevents the utilization of the only candidate tool, fiscal policy, with the result that policy in this moment is perceived as inertial, opaque and ineffective. The effect of such a perception on expectations is disruptive. The radical consequence of such a state of affairs is that we should at least temporarily (and conditionally to its full application when growth will resume) suspend the Stability pact, to be able to tackle the present exceptional circumstances. Of course, this should not imply that each country goes by itself. Coordination of fiscal policy at the ECOFIN level should be preserved and encouraged, but in a context in which it is clear to the economic agents that the priority of public action is the return to acceptable rates of growth in the shortest delay. After all, we are quickly moving towards a situation in which the Stability pact is de facto overlooked by the large countries, and it would be better and more credible if this was done in a transparent way.

How Can Aggregate Demand Be Boosted?

If, as is strongly desirable, the European governments agreed on creating a role for discretionary policy, it would remain to be seen how to proceed to sustain short term growth. There can be three lines of intervention:

(a) The first is to offer tax cuts. As a countercyclical measure, especially in the form that has already been partially implemented by some governments, 3 The role of government in facilitating coordination on a high growth equilibrium is all the more important if we consider the number of shocks that have hit the world economy in the past three years, and their nature. The financial bubble burst, September 11, the Iraqi war, are important shocks that have caught economic agents off guard, remarkably increasing their uncertainty. In this framework clarity and a tough countercyclical stance would have been even more necessary to sustain growth expectations and private expenditure.

tax cuts are only partially effective. In fact, theory and empirical evidence alike tend to tell us that permanent income increases tend to be spread over a long period, so that the short term effects on private expenditure may be deceiving. Furthermore, their effectiveness seems to be strongly dependent on who they are targeted to. The US experience shows that if most cuts benefit the richest, the effects on consumption spending are limited. Hence, to respond to the need of boosting aggregate demand, tax cuts should: (a) target expenditure rather than income (i.e. VAT reduction instead of personal income tax reduction); (b) be temporary; and (c) be targeted either to the lower brackets of the households (mass consumption goods), or to the firms. A temporary tax credit for investment, for example, would probably be effective to increase demand especially now that inventories are going back to their normal level. (b) Another proposal currently debated is a coordinated plan for infrastructure investment (the so called "Tremonti proposal"). This would be desirable and certainly beneficial for increasing long term productivity and the growth potential of the Union. Its short term effects, nevertheless would be much more limited. If this option were to be pursued, as it should, priority should be given to those projects that could immediately enter the operational phase, thus giving a short term impulse to aggregate demand. (c) Recent events have shown how the social capital of Europe deteriorated in the past few years, partly as a consequence of reduced public expenditure during the fiscal consolidation of the 1990s. Health, assistance to the elderly, education, basic research, urban renovation, are all fields on which fresh resources are badly needed. Furthermore these are all public goods in which the intervention of the government is necessary. Besides its short term effect on demand, a coherent (and why not, coordinated at the Union's level) program of expenditure on these items of the public budgets also constitutes an investment in human capital that will be reflected in future productivity.

To conclude, incentives to private expenditure (in the form of suitably designed tax cuts), investment in infrastructures, and investment in social capital, are all traditional instruments in the hands of governments whose utilization would in this moment be beneficial for enhancing growth. Furthermore, absent other means of short term demand management like monetary policy, they seem to be the only tools available to the policy makers in the present situation.

Figure 1 :

 1 Figure 1 : Euro area : Divergences in cyclical positions

Table 1 : Output Gap, OECD Definition

 1

In fact, monetary policy is in this moment acting countercyclically, being less expansionary in countries with lower inflation rates. This is the case especially for Germany and in a lesser extent for France, countries that more than others need an aggregate demand boost.

"An agenda for a Growing Europe. Making the EU Economic System Deliver", Report of an Independent High-Level Study Group established on the initiative of the President of the European Commission, Brussels, July 2003.