France…solving the problems of the Eurozone’s second biggest economy
28 October 2014
According to budgets they published this month, France and Italy are failing to meet the Euro area requirements for reducing Government debts and deficits to sustainable levels. Italy has given an indication that it will meet the European Commission half way and make some further adjustment, but France is taking a harder line.
If France, as a big country making up 20% of the Euro area’s GDP, were to be exempted from the EU debt and deficit rules, in ways that were not open to smaller euro area countries, this would do great damage to the credibility of the euro, and could drive up to the interest rate euro area governments must pay to borrow. It is thus very important to all EU states that France overcomes it’s problems.
In recent years, France has lost competitiveness, and is running a balance of payments deficit. In other words its people are spending more abroad, that than they are earning from abroad.
The French economy is projected to grow by only 1% in 2015, as against a projected growth of 2% in Germany and Spain, 2.7% in the UK, and almost 3% in Greece and Sweden.
The loss of competitiveness of France is due to several factors
+ Fewer people are working fewer hours for fewer years. For example, of people between 55 and 64 years of age, only 44% are still working in France, as against 73% in Sweden, 65% in Japan, 60% in the US and 58% in the UK.
+ There is substantial youth unemployment, because young people find it hard to get on the career ladder because of an over regulated labour market that protects existing jobs at the cost of discouraging the creation of new ones. Last year 80% of all new jobs created in France were on temporary contracts.
+ The bigger a company grows, the more rigid are the rules that apply to it in terms of the right to hire and fire. So, while France has some of the most successful big companies in the world, it lacks a large corps of middle sized export oriented companies, like Germany has. 90% of all French companies have fewer than 10 employees and they have strong incentives to stay small.
+ Monopolistic practices exist in a number of sectors controlled by the state and in some private professions. The vested interests protecting these monopolistic practices are very strong. These inefficiencies contribute to extra costs and loss of exports by French companies.
The current Socialist Government of Manuel Valls was making a serious effort to tackle these underlying weaknesses, but that the dividends of some the reforms, while very substantial, may be slow in coming, perhaps not in time for the 2017 elections.
There is a risk Prime Minister Valls will lose his majority because of defections in his own party. Meanwhile the opposition UMP is split on personality questions. The Front National is making huge strides in the polls, but its economic policy would break up the EU and introduce heavy state controls which would be incompatible with France’s global economic success. Meanwhile business leaders are afraid to speak up about the global realities France must face.
Faster growth is crucial, and the margin between success and disaster is very narrow. If the French economy grows at only 1% per annum over coming years, France could be on the road to ultimate default and a social crisis, but if it can manage a growth rate of 1.6% or better, it will work its way out of its difficulties.
The stimulus for French growth will have to come to come both from inside and outside France. French people save a lot, and if they could get the confidence to spend a little more of their savings, that would help. Likewise if Germany, which has been neglecting its infrastructure, stated to invest more that would help French exports.
The trouble is that French and Germany economists and politicians have very different intellectual assumptions, and dialogue between them can become a dialogue of the deaf. German economists may accept the Keynesian idea that one should spend extra in a down turn but they doubt if the other, essential, side of Keynes’s theory-running surpluses during the good times is politically realistic, and the historic evidence supports them.
Meanwhile, partly because it was wise enough to stay out of the Iraq debacle in 2003, France alone of the western powers, has the confidence to intervene directly in places like Mali, Libya and the Central African Republic.
France retains a strong nuclear deterrent and a civil nuclear industry that does not do the sort of climate damage that other EU countries’ energy industries do.
Politics are important. Its Presidential system enables France to be strong and decisive in international affairs.
But that strength does not extend to domestic economic policymaking, where factionalism and introspective thinking are preventing the creation of any kind of “Grand Coalition for Reform”, of the kind that has enabled countries like Germany and Mexico to deal decisively with long standing blockages to growth. France needs a new politics, even more than it needs a new economic model.
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