The country’s perceived inability to reform and overcome structural challenges is put forward as justification for any negative views the French economy may fairly or unfairly attract.
In our view, France’s loss of export market share has reached a worrying level and the French welfare state is being threatened by persistent deficits. The decision to finance generous social spending through taxes and corporate contributions has magnified its lack of competitiveness, as nominal wages have failed to adjust accordingly.
• Competitiveness: Since the start of the Euro, growth in French exports has consistently failed to keep up with exports growth. Currently, exports are concentrated in a small number of sectors, mostly where price sensitivity is low because of a strong high-tech content. Airbus and tourism are examples of export success stories and France still enjoys a comparative advantage in foodstuff, transportation and chemicals.
However, few national champions are taking advantage of globalisation, and growing competition from inside the euro area (mostly Germany) or outside Europe has crushed hopes of an export revival. Tax hikes, high intermediary costs and a drift in nominal wages have squeezed margins, thus weighing on investment. Restoring price and non-price competitiveness will require efforts in the short term (fiscal devaluation), the medium term (via curbing public spending, containing wage increase) and in the long term (by supporting investments, vocational training and education).
• Public finance and the welfare state: With public spending systematically outpacing revenues since the start of these series in 1957, the French government’s track record is not very encouraging and despite numerous statements and commitment to fiscal “reliability”, the return to a balanced budget still remains elusive.
With 2012 and 2013 budgets heavily tilted towards tax increases, future budgets should now deliver lower spending. 2014 shows how this can be achieved, even though it mostly entails a large reduction in fiscal spending. Reducing public spending is a slow, complex and politically costly process, and even more so in a low-growth and high-unemployment environment. However, it has become a necessity to make future tax cuts possible, we believe.
As structural imbalance is deeply entrenched, albeit less so in terms of yearly changes, the drive to reform is limited and relies on the willingness of ruling governments. The sense of urgency is not shared across the country and the support for reforms is porous at best. However, a clear illustration of the need for reforms and the size of the ongoing decoupling can be found in the comparison of GDP per capita versus Germany: while at the same levels until 2006, we expect the gap that subsequently opened to grow and exceed 10% by 2015.