Monday, May 1st 2017

Article By: David McDonald

The French economy is expected to see growth rates of 0.4% and 0.5% respectively in the upcoming quarters of 2017. 2020 growth rate projections are as high as 0.7% according to Trading Economics. 

As French voters go to the polls to elect a new president, the country’s relationship with the European Union, immigration and terrorism will all be important themes. Although projections for the French economy predict steady growth, these looming issues, among many others, may translate into a more difficult road to France’s economic develop than previously expected.

Brief overview of the weaknesses of the French Economy

  • Higher Corporate Taxes than anywhere else in the world.
    • High taxes lead to lower profits for French businesses and in turn, higher unemployment. These taxes also affect small businesses the most and make entrepreneurial start-ups in the country exceedingly difficult.
  • Unions are granted too much power within French industries, which cause the French government to cave in to Union demands.
  • Due to high corporate taxes, company regularly aims to outsource production, which also creates more unemployment.

The Specifics

France has “an enviable standard of living”, according to the Organisation for Economic Co-operation and Development (OECD). “Inequality is not excessive and the country has come through the [financial] crisis without suffering too heavily,” it says.

And it’s not just the French who like the place. It’s food, fashion, landscape and the delights of Paris have an international reputation that has helped make France the world’s most popular tourist destination.

But all is not well. Unemployment is high and the government’s finances are weak. “France’s fundamental economic problem,” the OECD says, “is a lack of growth.”

Paradoxically, the extent of the French state’s involvement in the economy has proved to be one of its main weaknesses, as well as one of its main strengths. In recent decades, the development of state favors and aid in certain economic sectors, along with the cost of major infrastructure programs and social services, have led to a huge increase in the budget of the French state. To finance its programs, the French government, like all others, has had to resort to increased taxation; but in France, a larger than usual proportion of this taxation has fallen on business, rather than on private individuals.

French business is currently burdened by the world’s highest level of the payroll tax (cotisations sociales), which at 43% are far higher than in any other country. The next highest rates are found in Spain and the Czech Republic (30%), while businesses in the UK pay a payroll tax (NI contributions) of just 11%, and those in the USA just 5%.

In an increasingly global economy, this disparity is damaging for French industries and is one of the perceived causes of endemic high unemployment in France. It has also led the French economy to suffer from offshoring, the export of jobs and manufacturing capacity to low-wage countries.

Until recently the fact that the burden on employers of payroll taxes is almost four times higher than that of NI contributions in the UK has not crippled French industry in the way that advocates of low payroll taxes would like to imagine; however, signs are that this is changing. In mid 2012, French automobile giant Peugeot announced a massive workforce reduction programme, including the suppression of 8,000 jobs in France: with hourly total labour costs in France now running at €34.2 per hour, among the highest in Europe (source Eurostat) and higher than any other major industrialized economy, the outlook is not good, especially with the new Socialist government set to increase overall labour costs rather than reduce them.

High tax burdens are particularly felt by small businesses. However, numerous counter-measures have been introduced by successive governments to offset their effect; these include lower levels of the payroll tax on workers paid at minimum wage, tax breaks for the hiring of young employees or apprentices, aids for employers in certain high-unemployment areas, and more. In all, there are dozens of forms of aid available to companies – and that is a problem in itself, as finding one’s way around the maze can be a daunting task. The system needs to employ hundreds of civil servants just for administration. “Simplification” is one of the most frequently heard demands made by small businesses in France.

The high level of corporate taxation in France is logically another of the principal causes of the falling competitiveness of French industry on the global market, and its growing trade deficit. These, in turn, contribute to France’s systemic problem of high unemployment.

The Unemployment Rate in France is much higher than in most developed nations.

Employee rights – though a great advantage from the employee’s point of view – are seen as another weakness of the French system, especially by employers.

 

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Many aspects of France’s social systems are piloted by complex management arrangements involving the state, management, and the unions – referred to collectively as “les partenaires sociaux”. Though less than 10% of workers in France belong to trade unions (far less than in the UK or the USA), unions wield considerable power through their role as partenaires sociaux. Thus, over the years, successive French governments of both the left and the right have given in to union demands in order to buy stability and popularity.

The result is a system whereby employees in France enjoy a high level of job protection and guaranteed salary levels. In large corporations this is not too much of a problem, but in small businesses, employers frequently hesitate to create jobs for fear of being unable to lay the new employees off without considerable penalties. Alternatively, they outsource work to foreign suppliers rather than employ staff locally, or resort to temporary contracts rather than offering full-time permanent jobs. This situation also depresses salaries. All this is bad for employment since, in all developed economies, it is small businesses that create most of the new jobs.

Strengths of the French economy

A common estimate of economic well-being is measured by GDP per capita – an area that France certainly does not fall behind in.

In many sectors, the French economy is among the strongest in the world. France is among the leading industrial economies in the automotive, aerospace, and railways sectors, as well as in cosmetics, luxury goods, insurance, pharmaceuticals, telecoms, power generation, defense, agriculture, and hospitality. France is also the world’s leading tourist destination – at least in terms of numbers, though not in terms of tourist spending.

French companies operate worldwide; they run some of the big red buses in London, as well as trains and bus services all over Europe, they run supermarkets on four continents, including over 200 hypermarkets in China, they produce some of the pharmaceuticals, beauty products, and dairy products people use in their daily lives worldwide; and much more.

 
Regarding its labor market, France has one of the highest levels of graduates, and the highest number of science graduates per 1000 workers of any European country.

In the years following the second world war, the French economy developed massively from a largely agrarian economy with over 40% of the population still living on the land, into a modern industrial economy with world-class corporations and business leaders.

In the years 1945 – 1975, known as “les trente glorieuses”, the French economy grew by an average of 4.1% in terms of GDP per inhabitant, far faster than the USA or the UK though slower than Germany or Japan. The French state – which for most of this time was in the hands of Conservatives – played an active role in the establishment of a series of four year plans (Contrats de plan), whereby the state set economic targets and economic priorities, but left it up to private enterprise to achieve or apply them.

Between 1945 and 1986, political leaders from de Gaulle (a conservative) to Mitterrand (a socialist) embarked on policies of nationalization and state intervention.

For de Gaulle, nationalization was seen as a tool of economic development, guaranteeing a stable environment for key sectors of the French economy, but also ensuring support from his opponents on the left. Car-maker Renault was nationalized by de Gaulle in 1945 as much to help it recover from the war, as to placate the Communist opposition and the unions.

For Mitterrand, nationalisation was ideological. During his first presidency, from 1981, Mitterrand initiated a series of nationalisations in a range of different sectors, including banking, insurance and pharmaceuticals. However, for his second presidency, he advocated the famous “ni-ni” doctrine (the neither nor doctrine), proposing neither nationalisation nor privatisation. In actual fact, this was a way of admitting the failure of his previous policy; during Mitterand’s second presidency, France embarked on a wholescale policy of privatisation, which continued during the Chirac presidency, reaching its peak under the government of socialist prime minister Lionel Jospin.

Yet beyond the issue of nationalisation or privatisation, the French state has maintained an above-average ability to intervene in economic affairs, remaining a major shareholder in utilities such as EDF where it has a majority holding, or France Telecom (Orange), in which it has a 27% holding.

As a result of its hands-on approach to economic management, France has been able to ensure some remarkable economic success stories. Among the most visible of these is France’s world-leading success in the field of rail infrastructure. France was the first country in the world to propose, plan and set up a dedicated high-speed rail network; today the country can boast the world’s second most extensive high-speed rail network (after Spain), one which runs without interruption from the North Sea to the Mediterranean, and east-west from near the German border to the lower reaches of the Loire.

When it comes down to hard facts, critics of state intervention in the French economy have to tread carefully.

Myths about the French economy

Finally, we come to those two big myths about the French economy; a) that the French are always on strike, and b) that the French work far less than other nations.

If a nation’s workers were constantly on strike, that would be a serious economic handicap; fortunately, this is not the case in France, and commentators who suggest otherwise are just making things up.

According to the IMD survey of 2008, France continues to lose less days to strikes per 1000 inhabitants (3.67 days) than either the UK (10.06) or the USA (5.67). The problem in France is that strikes are highly visible, because they tend to be concentrated in large public services and give rise to major protests and demonstrations in Paris…. within a few hundred yards of bureaux of many of the world’s main TV stations, press agencies, newspaper correspondents and other purveyors of news. When French public servants strike, the world knows all about it. Conversely the world never hears much about the vast majority of employees in France who never go on strike.

As for the perception that French workers work far less than their counterparts in other countries, that is not always the case. It is certainly true in some sectors, notably in the public sector and in large industries ; but it is not at all true in others.

According to the International Labor Organization, management level employees in France work among the longest hours in Europe (almost 10% longer than in the UK), while the workforce works slightly below the European average, putting in comparable hours to workers in Sweden, but more than workers in the Netherlands, Norway or Denmark. OECD figures (2012) also show that labor productivity in France, in terms of GDP per hour worked, is among the highest in Europe (only exceeded by Benelux countries and Ireland), and only fractionally lower than in the USA. Thanks to this, France has up to now managed to remain a major exporting nation and one of the top six economies in the world – though maintaining this position will not be easy, and France’s manufactured exports are currently declining at an alraming rate.

Perhaps the main perceived weakness of the French economy is that it is not run on quite the same model as what the French refer to as the “Anglo-Saxon” economies.

This does not make it intrinsically less successful, just different, though not so very different. France is home to many world-scale corporations; it has its millionaires and its entrepreneurs, several of the best business schools in Europe, it’s rich and its poor.

However, the gap between the rich and poor is not as flagrant as it is in many other countries, and the French want to keep it this way.

Recent developments in the French economy.

Since 2007, France like other countries has had to adapt to new global economic realities. It is doing so through measures designed to modernize its economy, but modernization in any country is often a difficult process.

The Sarkozy government became deeply unpopular in part (though not exclusively) through its programs of “reform”, which did not go down well with many French voters, particularly those who saw themselves losing out.

France suffered less than the UK and many other major economies from the economic downturn in 2007, but three years later it was also slower in bouncing back. The Sarkozy government, though undertaking certain reforms, such as raising the retirement age, failed to get seriously to grips with the most pressing problems of the French economy: firstly an excessively high level of taxation, and secondly – largely a result of the first problem – the falling competitiveness of French business in the international market.

In mid 2012, as the new socialist government set to work, the economy was sluggish, and deficits remained high. President François Hollande pledged to balance the budget by 2017, but for the time being France’s national debt continued to rise , and there was considerable scepticism among analysts as to whether Hollande would be able to meet the challenge. Initial measures announced by the new government, such as the partial rolling back of the retirement age to 60 for those having worked 41 years, and the creation of new jobs in the public education sector, were seen in many quarters as more liable to damage France’s economy than stimulate it.

A year into the Job, Hollande had failed to take any radical measures to reduce unemployment and restore French competitiveness. A deficit-reduction programme was announced, but with half of the reduction coming from increased taxes, most of them on business, many economists were underwhelmed. The timid reduction in public spending that was announced, though causing turmoil on Hollande’s “tax and spend” left wing, could not produce the stimulus that the French economy required, and unemployment continued to rise, French industry continued to suffer, and the green shoots of recovery remained desperately few and far between. The unexpected rise of 0.5% in French GDP in the second quarter of 2013 was due to consumer spending and government spending, not to increased production, and many analysts fear that it will not be sustained.

A year later, however, removing several of the more radical left-wingers from his government, Hollande moved hesitatingly but more definitely towards a new economic policy. After first appointing reforming social democrat Manuel Valls as prime minister, he then chose a former Rothschild’s banker, Emmanuel Macron, as minister for the economy, with the remit to get France’s economy back on the rails and able to compete more successfully in international markets. Macron’s proposals caused howls of protest from left wingers, and had to be pushed into law in spite of parliament; but they became law, even if they were slightly watered down. Then in 2016, new labor laws were passed, again without the consent of parliament – as is possible under the French constitution.

The much overdue but fundamental reform of the French economy has begun. It is likely to be amplified in the second half of 2017 during the first few months following the next French presidential and legislative elections. How fast, and how major the changes may be will depend on who forms the next French government.

[Disclaimer – all information retrieved from About-France.com | The Heritage Foundation | BBC – Homepage | OECD.org – OECD |

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