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The Progressive Economics Forum

Why France’s Economic Problems Matter

I’ve had the good fortune to live in France for the past 10 months on a year-long sabbatical and therefore been able to witness firsthand the travails of the Socialist government as it wrestles with the country’s economic woes.

Indeed, the unpopularity of president Francois Hollande was exposed a couple of weeks ago after nation-wide municipal elections when his party and the left got routed, while the right and far-right triumphed.

Hollande responded by firing his prime minister and replacing him with the charismatic interior minister, Manuel Valls. Yet Valls comes from the right-wing of the Socialist Party, even calling himself a “social liberal” instead of a social democrat, and is an admirer of Tony Blair (which, if you read my last post is never a good thing). Indeed, Valls quickly announced measures to cut spending of (US) $69-billion from the budget between 2015 and 2017, and admitted that France’s prized welfare programs would not escape the axe. “I am obliged to tell the truth to French people. Our public spending represents 57% of our national wealth. We can’t live beyond our means,” Valls said in announcing the reforms.

Soon afterwards, as many as 100,000 protesters, led by the parties to the left of the Socialists, marched in Paris against austerity measures. Alexis Tsipras, leader of the Greek leftist party Syriza (and perhaps his country’s next prime minister), was in attendance to show his support. The demonstrators reflected the growing fatigue in Europe to years of austerity imposed since the credit crisis began. After all, they’ve seen too few benefits and far too many negative consequences, in particular poor or no growth (or in Greece’s case, dramatic shrinkage).

France’s economic travails are worth examining for a host of reasons. As a country that enjoys a strong social safety net, protections for workers, and a vibrant labour movement, France is at that critical juncture where it seems poised to begin tearing down its social democratic infrastructure by embracing the neo-liberal playbook of austerity. It’s a plan that will result in the familiar tragedy of enriching the already wealthy and international lenders while marginalizing those on the lower economic strata.

France is also worth examining because it weathered the credit crisis better than most countries due to its conservative banking industry and social programs, which ensured that money continued to be pumped into the economy.

Today, however, France is going through a wrenching period of soul searching because of its anemic economy (in January, The Guardian headlined a column “France: the new sick man of Europe”). The right is making the usual complaints France has a bloated civil service, lacks entrepreneurialism, has onerous protections for employees, and the French are lazy and take too many holidays. Yet, despite such whinging, France has a quality of life envied around the world – one of the reasons it remains the most popular tourist destination on the planet.

So what is the real state of France’s economy? Here there is good and bad news. With a population of 63.7 million people, France is the world’s fifth-largest economy, with a GDP of $2.9-trillion. It has a modern, diverse economic base, with 51 of the world’s 500 largest corporations (by comparison Canada has only 9), and is the second most important location in the world for the headquarters of those 500 companies. France has more millionaires than any other European country and is the 4th wealthiest nation in aggregate household wealth. It currently ranks 20th on the Human Development Index. France is a country that manufacturers a wide range of goods, including cars, trains, ships and airplanes.

The bad news is that the economy is staggering. The official unemployment rate is 10.4% (and as high as 10.8% in 2013), which translates into 3.35 million unemployed (Germany’s unemployment rate in contrast is 5.1% and is having trouble finding enough young people to fill jobs). France has also been de-industrializing, with its portion of GDP produced by industry dropping from 15.4% in 2005 down to 12% today. Like most of the eurozone, France is being pummeled by Germany, which has been adept at producing products cheaply and efficiently. France’s economic growth the past three years has been averaging 0.8% as compared to twice that for Germany. Youth in France are increasingly looking abroad for work.

In fact, many observers are pointing to Germany and its labour market reforms as holding the solution to France’s economic woes. It is often noted that the French work shorter hours than other major European economies (1,679 hours a year, compared to 1,904 hours in Germany), retire earlier (average retirement age 60.3 years) compared to 62.6 in Germany, and 64.1 in the UK, and take more holidays – 36 days per year.

Yet the notion that the French are lazy is belied by the reality that they achieve their high standard of living while working 16% less hours than the average world citizen, and almost 25% than their Asian peers. On the other hand, according to the World Economic Forum, France’s labour market efficiency ranks 71st out of 148 countries, with hiring and firing practices ranked as the 144th most efficient. It’s hourly labour costs are among the highest in the eurozone.

Hollande has responded to this state of affairs by announcing cuts to both the public sector and to taxes, and by reducing red tape for companies. (Initially when he was elected in 2012, he planned to tax the wealthy as high as 75%, but that got derailed along the way.)

France faces a real conundrum that is now widespread among all capitalist economies: do you bring down unemployment by making your cost of labour cheaper? This is what Germany ultimately did. But the effect is to depress demand for goods within your own economy. And even if you succeed, you end up in a dog fight with other countries in a race to the bottom of labour costs. In capitalism, there are always winners and losers. But in today’s globalized workshop, workers are rarely the winners.

Indeed, Hollande seems reluctant to take a run at the labour movement to drive down French workers’ wages. The right is saying this is the solution to his country’s economic woes. But it would also mean the end of the very thing that makes France special – it’s unique quality of life and social benefits (which include a wonderful health care system, free education for university students, and bountiful pension benefits).

In the end, why France is important to look at is that it might fall victim to what capitalism always does : makes you choose either employed poverty or unemployed poverty. While there is no doubt that many things could be done to improve the French economy and lower unemployment, doing it at the expense of wages and a social security net is not the way to go.

Enjoy and share:

Comments

Comment from fjf
Time: April 22, 2014, 8:39 am

France has more millionaires than any other European country
END QUOTE
Interesting stat. I believe the Rolling Stones are residents of France and moved there to avoid UK taxation. There is anecdotal evidence of others making the same move.

This suggests that the French tax system is overly generous to the holders of wealth. I further suspect that the proposed “tax cuts” will favour the well off and increase the need for additional cuts to social programs.

Comment from Thomas Bergbusch
Time: April 22, 2014, 10:32 am

I think distinctions between “social-democrats” and “social liberals” have no meaning at all as long as France is part of the Euro zone.

Comment from John Richmond
Time: April 22, 2014, 11:45 pm

Great, concise, informative review. Perhaps what this demonstrates more than anything is that – once again – capitalism (in its current form anyway) cannot be made to “work” for anyone but the capitalists. Germany’s policies are successful only in that they are of the “beggar-thy neighbour” type (and beggar-thy-worker) while every other country in the Euro-zone stumbles from pillar-to-post. Old fashioned social democratic policies would probably help to rescue the capitalists from themselves but the EU and globalization make such policies impossible.
I doubt Alexis Tsipras has much of an idea for how to turn things around either unless he can somehow magically convince ALL of what is left of the Euro lefties to go along with him.

Comment from Larry Kazdan
Time: April 24, 2014, 3:56 am

Eurozone – what do they propose as an encore?

http://bilbo.economicoutlook.net/blog/?p=25872

“While the source of the crisis was the financial instability wrought by the massive buildup in private debt and the failure of governments to regulate the financial sector appropriately, the reason the damage has been amplified in the Eurozone relates to the intrinsic flawed design of the monetary union.

The key to ending their Eurozone crisis is resolving those endemic flaws, which, as I’ve noted in the past, either require the creation of a truly federal fiscal capacity or a breakup of the monetary union. A related requirement is that the un-workable fiscal rules embodied in the Stability and Growth Pact be abandoned and member states be permitted to run appropriately scaled deficits to maintain domestic demand when a negative aggregate demand shock hits the European economy.

It is a combination of the Eurozone nations using a foreign currency (the Euro) and the issuers of that currency (the ECB) not permitting the nations to run appropriate deficits that is at the core of the Eurozone problem.

Making the nation’s more competitive will not overcome that endemic flaw.”

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