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.