How to solve the problems of Europe’s second biggest economy

This article was originally published on Fair Observer.

John Bruton | If France, as a big country making up 20% of the European Union’s (EU) gross domestic product (GDP), were to be exempt from EU debt and deficit rules — in ways that are not open to smaller eurozone countries — this would do great damage to the credibility of the euro, and could potentially increase the interest rate governments must pay to borrow. It is, therefore, very important to Ireland that France overcome its problems.

In recent years, France has lost competitiveness, and is consequently running a balance of payments deficit. In other words, its people are spending more abroad than they are earning from abroad. The French economy is projected to grow by only 1% in 2015, against a projected growth of 2% in Germany and Spain, 2.7% in Britain and almost 3% in Greece and Sweden. The loss of competitiveness of France is due to several factors:

1) Fewer people are working less hours. For example, of people between 55-64 years of age, only 44% are working in France, as against 73% in Sweden, 65% in Japan, 60% in the United States and 58% in Britain.

2) There is substantial youth unemployment, because young people find it hard to get on the career ladder due to an overregulated labor market, which 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.

3) The bigger a company grows, the more rigid the rules are 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 large corporations of middle-sized export-oriented firms like Germany has. Ninety percent of all French companies have fewer than ten employees, and they have strong incentives to stay small.

4) 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 the loss of exports by French companies.

There was a strong sense among participants at the conference that the current socialist government of French Prime Minister Manuel Valls was making a serious effort to tackle these underlying weaknesses, but that the dividends of some reforms, while very substantial, would be slow in coming — perhaps not in time for the 2017 elections.

There is a risk that Valls will lose his majority because of defections in his own party. Meanwhile, the opposition, the Union for a Popular Movement (UMP), is split on personality questions. The National Front 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.

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 the coming years, France could be on the road to 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 difficulties.

The stimulus for French growth will have 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 — set out to invest more, that would help French exports. The trouble is French and German economists and politicians have very different intellectual assumptions, and dialogue between them can become a dialogue of the deaf.

Meanwhile, partly because it was wise enough to stay out of the Iraq debacle in 2003, France has the confidence to intervene alone in places like Mali, Libya and the Central African Republic.

France retains a strong nuclear deterrent and a civil nuclear industry, which don’t inflict the sort of climate damage that other EU countries’ energy industries do.

Politics is important. France’s presidential system enables it to be strong and decisive in international affairs. But that strength does not extend to domestic economic policymaking, where factionalism and introspective thinking prevent the creation of a “grand coalition for reform,” of the kind that has enabled countries like Germany and Mexico to deal decisively with long-standing blockages to growth.

This article was originally published on Fair Observer.


*The views expressed in this article are the author’s own and do not necessarily reflect The Corner nor Fair Observer’s editorial policy.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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