While France still ranks amongst the richest nations in
the world, the country has been losing ground in international rankings over
the past 30 years and the downward spiral seems to have accelerated over the
past decade. Initially reluctant to admit it, the French seem increasingly
conscious of the negative trend for their country. They now even stand amongst
the most pessimistic of the industrialised world, with consumer confidence
reaching record lows in the first half of 2013. But while this could be seen as
an opportunity to undertake structural reforms, few politicians so far have
found the courage to face a reluctant public opinion. True that France has
built one of the most protective welfare states in the world and the French see
any reform as a risk of losing parts of that relative comfort. It seems easier
to blame globalisation and the Euro for the country’s decline. So the paradox
is here: while both French politicians and the general public are convinced of the
need for reform, the country seems static, with anaemic growth and a persistent
high unemployment, but no drastic political decision to address the issues.
Fundamentally, the French economy suffers from two critical issues: a heavy debt load and a growing competitiveness gap.
The first issue is common to most European countries and is related to the structural deficits that France has been accumulating since the mid-1970s. France’s last balanced Budget was 1980’s and the State’s Budget has not generated a proper surplus since 1974. The public debt load accumulated over the past forty years is reaching this year a historic high of €1,870bn, or close to 100% of GDP. The figure compares with the 60% upper limit fixed in the Maastricht Treaty and considered a critical threshold among EU member countries until the mid-2000s. Even more worryingly, the prospect of a reduction in the annual Budget deficits is slim. In 2013, France will generate an incremental State deficit of 4% of GDP while Germany will have balanced accounts. It is interesting to note that Germany and France had similar deficit and public debt levels a decade ago. So it seems clear that France has given up the fight for financial sanity over the past ten years.
With interest rates at historic lows, the general sentiment – largely shared by French politicians - is that debt is cheaper than ever and therefore should not be a concern. The fight against deficits is often seen as detrimental to economic growth. Furthermore, deficits are used to finance artificial ways to support the economy. This takes the form of all kinds of subsidies or tax exemptions. The example of Japan should be enough to convince leaders of the lack of efficiency of such policy. Despite the accumulation of debt up to a record level of 240% of GDP, Japan has been unable to underpin its static growth and is suffering from a structural decline in industrial production. Japan’s only remaining economic tool seems to be currency devaluation, which is not an available option for members of the Eurozone. Meanwhile the debt burden is accumulating and will have to be addressed by future generations.
In France specifically, the inability to reduce Budget deficits illustrates an additional blocking factor: the difficulty to reduce the size and cost base of a gigantic Administration. According to official statistics, 5.5 million people work directly for the State, local authorities or public hospitals. This is 1.4 million more people than in 1980 and today represents 22% of the French workforce. These people benefit from the highly advantageous status of so-called “fonctionnaires” (civil servants), which gives them access notably to job stability and a privileged retirement scheme, financed by the State. It is worth noting that France has a proportion of c.90 civil servants for 1000 inhabitants, which is almost twice as much as Germany. To these 5.5 million people, one can add an estimated 2 million employees (in transport, postal services, education) paid by the State without benefitting from the official civil servant status. So overall approximately one out of four French workers is employed by the State. These employees account for about half (48%) of the State’s annual Budget, or 15.5% of GDP. And overall public spending accounts for 57% of French GDP, the highest share in the Euro zone.
Successive governments have been very hesitant to address this massive cost burden. First of all because the French are deeply attached to the civil services that they are getting from the State. The French are proud of their high-speed trains, of their public hospitals and schools. Each closure of a local post office or judicial court triggers a press campaign in local and national newspapers. Mr Sarkozy’s plans to reduce the number of civil servants have made him unpopular. Conversely Mr Hollande seduced the public by his shocking promise during the 2012 Presidential election campaign to hire 60,000 additional teachers over 5 years (a measure approved by 86% of the young voters). It is revealing to note that, according to a 2012 survey by the Ipsos Institute, 73% of the young French would like to work for the French Administration!
The second reason for the difficulty for political leaders to address the issue of an over-sized Administration is that civil servants are a significant part of the electorate and have been particularly vocal in defending their specificity (should we say privileges…?) through trade unions. While trade unions represent hardly 10% of the total workforce in France - another structural difference with Germany – they can account for up 30-40% of the employees in state-owned companies like energy operator EDF or the public train operator SNCF.
Hardly any structural reform of the French debt issue can be undertaken without the implicit approval of the trade unions. Forgetting this could lead to long strikes likely to block the country as it did a few times over the past twenty years.
This explains why so far the main tool used by governments has been tax increases. But with a tax burden reaching 45% of GDP in 2012, France stands at the top end of OECD countries. The rate compares with OECD average of 35%. Such tax pressure cannot afford to increase much further (and it will in 2013), at the risk of deeply affecting economic activity. With the fiscal recipe largely utilised, France will not be able to avoid for much longer addressing the cost base of its public Administration.
Besides the issue of a heavy debt load, France suffers from a more specific and as concerning issue: the clear loss of competitiveness of its corporate sector over the past decade. As this corresponded to the implementation of the Common currency, it proved easy and convenient for politicians to blame Europe. But Germany has managed to much improve its competitiveness over that same period, using the same currency. Same for Scandinavia and even to some extent for Spain.
France’s trade balance has been deteriorating to a worrying extent. From a small surplus in 2003, France will have this year one of the largest trade deficits of the Eurozone (€67bn in 2012). The comparison with Germany is cruel: both countries had comparable surpluses in the mid-1990s while Germany will report more than €200bn surplus in 2013.
France’s trade deficit remains somewhat contained by the fact that its slow economic growth has been limiting imports over the past few years. But the figures hardly hide the fact that the country’s exports are stagnant while they used to be a source of strength for the French economy up until a decade ago. French products no longer sell abroad and this must be seen as a serious concern for the future of the country’s industrial production. French exports account for 3% of world exports versus 6% in the mid-1990s (source: IMF). Italy and to some extent the UK have been following comparable paths. Over the same period, German exports have only declined from 10% to 8%, and today account for a similar weight in international trade as the US. Meanwhile, Spanish exports have kept a stable share of 2%. It is revealing that German exports to China have increased tenfold from $8bn in 2000 to $80bn in 2013, while France has only moved c.$5bn to $20bn. So what is happening to France? Probably two sorts of issues: investments are insufficient and labour costs are too high.
France’s production capacity has hardly increased over the past twenty years. While the situation is similar in Spain and even worse in Italy or the UK, Germany has been investing so that its manufacturing capacity is now 40% higher than it was in the mid-1990s. Germany managed to implement such capital expenditure without affecting either internal consumption or savings. It represents today a major asset for the country. In comparison, France looks to have changed category and no longer being in the race for industrial production.
The second kind of issues can explain France’s lack of industrial investments: production and labour costs are clearly too high. Employers have been complaining about this factor for many years but successive governments have been shy to implement changes. The reform of French corporate charges has also recently been recommended by Mr Louis Gallois, previous CEO of transport operator SNCF and of French-German defence group EADS, in a report on the French economy commissioned by President Hollande. French companies have to bear 65.7% of taxes on their profits, mostly through social charges, versus 46.7% in Germany and an average of 44.7% across Europe. Statistics also show that French unit labour costs are above 110 compared to a 100 base in 2003 (source: INSEE, Natixis). Over the same period, industrial prices have fallen by about 5%. This has created a productivity gap of more than 15% which is hard to fill.
While politicians are clearly aware of the need to support corporate investments to underpin growth and employment, it remains a sensitive topic in France to favour the enterprise. Trade unions have traditionally been arguing for higher wages and job security rather than fiscal incentives to companies. This has created a degree of rigidity in the French labour market which is close to paralysing and which no government is particularly eager to address. Companies hardly find any incentive to invest or hire in France. Several of the current socialist representatives were even suggesting during the 2012 campaign that French corporates should be forbidden to lay off people as long as they are making profits. So mentalities need to evolve in times where France can no longer live on its own wealth and has to face global competition.
France remains a rich country which is largely living on its past successes, giving an impression of eternality. The French are conscious of the fundamental issues of their economy but hardly trust any politician to undertake the changes. So the real risk that France is facing today is immobility. While Spain is fighting to reconquer lost wealth and international market shares, France gives a worrying impression of passivity. And one ends up waiting for the situation to deteriorate further so that there will be no other alternative than to reform.
Fundamentally, the French economy suffers from two critical issues: a heavy debt load and a growing competitiveness gap.
The first issue is common to most European countries and is related to the structural deficits that France has been accumulating since the mid-1970s. France’s last balanced Budget was 1980’s and the State’s Budget has not generated a proper surplus since 1974. The public debt load accumulated over the past forty years is reaching this year a historic high of €1,870bn, or close to 100% of GDP. The figure compares with the 60% upper limit fixed in the Maastricht Treaty and considered a critical threshold among EU member countries until the mid-2000s. Even more worryingly, the prospect of a reduction in the annual Budget deficits is slim. In 2013, France will generate an incremental State deficit of 4% of GDP while Germany will have balanced accounts. It is interesting to note that Germany and France had similar deficit and public debt levels a decade ago. So it seems clear that France has given up the fight for financial sanity over the past ten years.
With interest rates at historic lows, the general sentiment – largely shared by French politicians - is that debt is cheaper than ever and therefore should not be a concern. The fight against deficits is often seen as detrimental to economic growth. Furthermore, deficits are used to finance artificial ways to support the economy. This takes the form of all kinds of subsidies or tax exemptions. The example of Japan should be enough to convince leaders of the lack of efficiency of such policy. Despite the accumulation of debt up to a record level of 240% of GDP, Japan has been unable to underpin its static growth and is suffering from a structural decline in industrial production. Japan’s only remaining economic tool seems to be currency devaluation, which is not an available option for members of the Eurozone. Meanwhile the debt burden is accumulating and will have to be addressed by future generations.
In France specifically, the inability to reduce Budget deficits illustrates an additional blocking factor: the difficulty to reduce the size and cost base of a gigantic Administration. According to official statistics, 5.5 million people work directly for the State, local authorities or public hospitals. This is 1.4 million more people than in 1980 and today represents 22% of the French workforce. These people benefit from the highly advantageous status of so-called “fonctionnaires” (civil servants), which gives them access notably to job stability and a privileged retirement scheme, financed by the State. It is worth noting that France has a proportion of c.90 civil servants for 1000 inhabitants, which is almost twice as much as Germany. To these 5.5 million people, one can add an estimated 2 million employees (in transport, postal services, education) paid by the State without benefitting from the official civil servant status. So overall approximately one out of four French workers is employed by the State. These employees account for about half (48%) of the State’s annual Budget, or 15.5% of GDP. And overall public spending accounts for 57% of French GDP, the highest share in the Euro zone.
Successive governments have been very hesitant to address this massive cost burden. First of all because the French are deeply attached to the civil services that they are getting from the State. The French are proud of their high-speed trains, of their public hospitals and schools. Each closure of a local post office or judicial court triggers a press campaign in local and national newspapers. Mr Sarkozy’s plans to reduce the number of civil servants have made him unpopular. Conversely Mr Hollande seduced the public by his shocking promise during the 2012 Presidential election campaign to hire 60,000 additional teachers over 5 years (a measure approved by 86% of the young voters). It is revealing to note that, according to a 2012 survey by the Ipsos Institute, 73% of the young French would like to work for the French Administration!
The second reason for the difficulty for political leaders to address the issue of an over-sized Administration is that civil servants are a significant part of the electorate and have been particularly vocal in defending their specificity (should we say privileges…?) through trade unions. While trade unions represent hardly 10% of the total workforce in France - another structural difference with Germany – they can account for up 30-40% of the employees in state-owned companies like energy operator EDF or the public train operator SNCF.
Hardly any structural reform of the French debt issue can be undertaken without the implicit approval of the trade unions. Forgetting this could lead to long strikes likely to block the country as it did a few times over the past twenty years.
This explains why so far the main tool used by governments has been tax increases. But with a tax burden reaching 45% of GDP in 2012, France stands at the top end of OECD countries. The rate compares with OECD average of 35%. Such tax pressure cannot afford to increase much further (and it will in 2013), at the risk of deeply affecting economic activity. With the fiscal recipe largely utilised, France will not be able to avoid for much longer addressing the cost base of its public Administration.
Besides the issue of a heavy debt load, France suffers from a more specific and as concerning issue: the clear loss of competitiveness of its corporate sector over the past decade. As this corresponded to the implementation of the Common currency, it proved easy and convenient for politicians to blame Europe. But Germany has managed to much improve its competitiveness over that same period, using the same currency. Same for Scandinavia and even to some extent for Spain.
France’s trade balance has been deteriorating to a worrying extent. From a small surplus in 2003, France will have this year one of the largest trade deficits of the Eurozone (€67bn in 2012). The comparison with Germany is cruel: both countries had comparable surpluses in the mid-1990s while Germany will report more than €200bn surplus in 2013.
France’s trade deficit remains somewhat contained by the fact that its slow economic growth has been limiting imports over the past few years. But the figures hardly hide the fact that the country’s exports are stagnant while they used to be a source of strength for the French economy up until a decade ago. French products no longer sell abroad and this must be seen as a serious concern for the future of the country’s industrial production. French exports account for 3% of world exports versus 6% in the mid-1990s (source: IMF). Italy and to some extent the UK have been following comparable paths. Over the same period, German exports have only declined from 10% to 8%, and today account for a similar weight in international trade as the US. Meanwhile, Spanish exports have kept a stable share of 2%. It is revealing that German exports to China have increased tenfold from $8bn in 2000 to $80bn in 2013, while France has only moved c.$5bn to $20bn. So what is happening to France? Probably two sorts of issues: investments are insufficient and labour costs are too high.
France’s production capacity has hardly increased over the past twenty years. While the situation is similar in Spain and even worse in Italy or the UK, Germany has been investing so that its manufacturing capacity is now 40% higher than it was in the mid-1990s. Germany managed to implement such capital expenditure without affecting either internal consumption or savings. It represents today a major asset for the country. In comparison, France looks to have changed category and no longer being in the race for industrial production.
The second kind of issues can explain France’s lack of industrial investments: production and labour costs are clearly too high. Employers have been complaining about this factor for many years but successive governments have been shy to implement changes. The reform of French corporate charges has also recently been recommended by Mr Louis Gallois, previous CEO of transport operator SNCF and of French-German defence group EADS, in a report on the French economy commissioned by President Hollande. French companies have to bear 65.7% of taxes on their profits, mostly through social charges, versus 46.7% in Germany and an average of 44.7% across Europe. Statistics also show that French unit labour costs are above 110 compared to a 100 base in 2003 (source: INSEE, Natixis). Over the same period, industrial prices have fallen by about 5%. This has created a productivity gap of more than 15% which is hard to fill.
While politicians are clearly aware of the need to support corporate investments to underpin growth and employment, it remains a sensitive topic in France to favour the enterprise. Trade unions have traditionally been arguing for higher wages and job security rather than fiscal incentives to companies. This has created a degree of rigidity in the French labour market which is close to paralysing and which no government is particularly eager to address. Companies hardly find any incentive to invest or hire in France. Several of the current socialist representatives were even suggesting during the 2012 campaign that French corporates should be forbidden to lay off people as long as they are making profits. So mentalities need to evolve in times where France can no longer live on its own wealth and has to face global competition.
France remains a rich country which is largely living on its past successes, giving an impression of eternality. The French are conscious of the fundamental issues of their economy but hardly trust any politician to undertake the changes. So the real risk that France is facing today is immobility. While Spain is fighting to reconquer lost wealth and international market shares, France gives a worrying impression of passivity. And one ends up waiting for the situation to deteriorate further so that there will be no other alternative than to reform.
JHL
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