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What is the French economic problem?

2016-04-29 09:04:43

By Andrew Walker BBC World Service Economics correspondent

29 April 2016

France has a lot going for it.

It 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. Its food, fashion, landscape and the delights of Paris have an international reputation that have 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."

The latest figures for economic activity (gross domestic product or GDP) for the first quarter of the year show growth of 0.5%. That's better than was expected though it's probably best described as reasonable rather than strong. The longer term picture is more downbeat.

So what is the French economic problem?

Jobless totals

The most obvious social and economic evidence that something is amiss is unemployment.

About three million people are unemployed - 10.2% of the workforce. That compares with a figure of 4.3% across the border in Germany.

The rate in France is almost the same as the average for the eurozone. That really is nothing to be proud of when you consider that the average reflects some jobless nightmare stories such as Spain and Greece.

The French figure is also the second highest among the G7 leading developed economies.

Youth unemployment is a particular problem, as it is in a number of other European countries. Almost one in four of those under 25 who want a job don't have one.

The government's finances are also in indifferent shape.

France is also in the throes of an EU procedure that tries to impose discipline on governments' finances. The annual budget deficit and the accumulated government debt are both higher than they are supposed to be under the rules.

It's worth noting, however, that the French government's borrowing costs in the financial markets are nonetheless very low.

In fact the French Treasury has managed to conduct some borrowing in the markets at interest rates below zero - in effect being paid to borrow money.

That partly reflects the intervention of the European Central Bank, which is buying eurozone government bonds under its quantitative easing programme.

But even so, such low interest rates are a sign that investors in the financial markets have confidence that they will be repaid on time.

'Dual labour market'

Behind the problems lies persistently weak economic growth.

Gross domestic product per person - a rough and ready indicator of average living standards - grew more slowly between 1995 and 2007 than in any other OECD country (mainly the rich nations) except Italy.

By the end of last year, economic activity was only 2.8% up from its peak level at the onset of the financial crisis.

Why then is France struggling?

There are different views among economists - mind you, when weren't there?

The view of many, including the OECD and the European Commission, is that the labour market is at the heart of the problem, though it's not the only factor.

That reflects a persistent complaint from business: that it's too expensive to hire workers and to fire them or lay them off if they need to.

France is a prime example of what is known as a "dual labour market":

insiders have higher pay, job security and often promotion prospects

others, especially younger people, get only short-term work or none

The OECD says in its assessment of the French economy: "To reduce the duality of the labour market, the procedures for laying off employees, particularly those on permanent contracts, need to be simplified and shortened .

"France ranks among the countries with the strictest legislation of dismissal for open-ended and temporary contracts."

The cost of labour to employers in France also includes social security contributions that are higher than in most other countries.

There is a catalogue of other issues, including welfare, that is alleged to discourage people taking low-paid work, and extensive regulation of business.

The result, it is argued, is a persistent unemployment problem.

Low demand

Many also argue that France has too large a public sector. It is one of the largest in the world, accounting for 57% of national income or GDP last year.

France does have high levels of public services, but the OECD says it means there is a "heavy burden of taxation" that curtails incentives to work, save and invest. Much of the spending, the OECD says, is poorly targeted.

The contrary view is that France is suffering from insufficient demand for goods and services.

A group of economists including Thomas Piketty, the author of Capital in the Twenty-first Century, wrote in the French newspaper Le Monde that labour law reforms proposed by the government won't reduce unemployment.

He has blamed austerity for setting back the eurozone's economic recovery.

Robert Hancke of the London School of Economics blames the loss of economic policy control as a result of membership of the eurozone.

"French growth and unemployment do not, did not, and never have depended on a more flexible labour market.

"The problem with France is simple: it is in a monetary union with Germany, a much stronger, better-organised, economy and therefore pays a high cost in no longer being able to control the main levers of economic adjustment, from interest rates via exchange rates to fiscal policy."

Attempts to reform

Membership of the eurozone means some of those levers, in particular interest rates, are in the hands of the European Central Bank, which sets policy for the whole region.

The strains on the government's finances and the eurozone's rules for managing them limit France's room for manoeuvre to use government spending or tax cuts to stimulate demand.

The OECD does say, however, that it's important to consolidate the government finances at an "appropriate and recovery-compatible pace".

In other words, don't overdo it and impose excessive damage on the economy by hitting demand even more in the effort to get borrowing needs down to levels that are sustainable in the long term.

President Hollande has accepted the case for labour reform, and his Labour Minister, Myriam El Khomri, has introduced legislation intended to address some of the things that business voices say make it too expensive to take on new workers. The reforms would:

lower existing high barriers to laying off staff

allow some employees to work more - far more - than the current working week, which is capped at 35 hours

give firms greater powers to cut working hours and reduce pay

That has met protest and the provisions have been amended in response. One supporter of reform said it was turning into a "veritable catastrophe".

It is startling language in light of the standard of living enjoyed by many French people.

But there's no question that the country's disappointing performance is an issue for its unemployed, for its social cohesion and for its European neighbours, who could really do with a strong, vibrant French economy.