France launches 100bn coronavirus recovery plan - Almost a third of funds will go towards green investments, including hydrogen energy, Victor Mallet in Paris SEPTEMBER 3 2020

France has launched a 100bn plan to rescue its economy from the coronavirus crisis with big investments in green energy and transport as well as industrial innovation. Announcing the "France Relance" (France Relaunch) plan in Paris on Thursday, Prime Minister Jean Castex said its "historic ambition and size" made it almost four times as large as the national plan introduced after the 2008 financial crisis. At 4 per cent of gross domestic product, it was the "most massive" plan unveiled in Europe so far relative to the size of the economy, he said. Ministers said 30bn of the plan would be spent on "ecological transition", including 9bn on the development of a hydrogen industry and other green technologies, 4.7bn for the state railways and 6.7bn on improving insulation in homes and public buildings. TheEuropean Commission and the German government are also promoting hydrogen technology. A further 35bn will go to industrial competitiveness and innovation, including 20bn in reduced production taxes for industry over two years and 1bn to help the "reshoring" of strategic businesses in sectors such as health and IT. The final 35bn is for "social and regional cohesion", including employment projects and skills training for the young. Unlike Germany's 130bn recovery plan, which included a cut in value added tax, France's strategy aims primarily to boost investment rather than stimulate demand. The government expects the economy to shrink up to 11 per cent this year as a result of the pandemic and a nationwide lockdown from mid- March to mid-May, and the state has already spent tens of billions of euros to avert mass bankruptcies and a surge in unemployment. [...] Mr Castex and Bruno Le Maire, the finance minister, both said they expected the economy to recover to its pre-crisis level by 2022 as a result of the huge investments contained in the plan, of which 40bn will come from EU grants disbursed by the bloc's 750bn recovery programme brokered in July by French president Emmanuel Macron and German chancellor Angela Merkel. [...]

One unintended consequence of the crisis has been to increase the role of the state in the economy Mr Le Maire called it a "rebalancing of the roles of the market and the state" and some economists warned that there was a risk of the government assuming it could pick "industries of the future". "The risk of misallocation is high," said Augustin Landier, finance professor at HEC Paris, complaining of a "fuzziness" in the new plan. Jean-Herv Lorenzi, president of the Cercle des Economistes, said the plan needed to be accompanied by confidence-building measures to persuade French consumers to release the 100bn of precautionary savings they had made this year, as well as by more measures to encourage housing construction and support new entrants to the job market. But he added: "On the whole, no one is going to attack this plan head on. It's up to the job, and it's the size it needs to be."

A) Briefly discuss the specific characteristics and evaluate the potential positive and negative effects of the fiscal policies adopted by the French Government to tackle the recession induced by the Coronavirus pandemic in 2020.

B) Explain and illustrate the theoretical impact of these fiscal policies using the Keynesian Cross diagram. Explain the multiplier effect and show it in your diagram.

C) Explain how the accelerator effect and time lag arguments apply to the French fiscal policy measures.

D) A major pandemic forces the government to lockdown the population and reduce production in large sections of the economy for several months. Explain how this might impact the economy. Show (draw) the impact of this scenario using the Classical 4x4 diagrams and the Classical aggregate supply and demand diagram. Explain the changes (shifting elements) as well as causes and effects in the diagrams.