France and her Economy

Mar 26, 2017

Polling indicates that Front National presidential candidate Marine Le Pen does particularly well among young people under the age of twenty-four. Part of the explanation for that support lies in the alienation and disappointment that comes from high unemployment: in France, unemployment is at 10 per cent, and youth unemployment runs at over 25 per cent. The French unemployment challenge is not the result of the ups and downs of the economic cycle, however — rather, it is structural. No matter how well the general economy performs, unemployment there remains relatively high; a poor labour market performance is a permanent feature of the French economy.

France’s structural economic problems

This year, the economy in the Eurozone has been improving, and the ECB is debating when and how it can withdraw its monetary stimulus, yet the improving macro-economic performance barely touches the structural problems of the French economy. In many respects, France passes many of the macro-economic tests of good financial management: balanced balance of payments in rough balance, with a modest deficit of around 1 per cent of GDP; inflation below 2 per cent; and a savings ratio of 14 per cent. Although the public finances remain difficult with a budget deficit of 3 per cent of GDP and a stock of government debt at over 124 per cent of GDP, this is a ratio that is still rising. What France fails, unambiguously, is the micro-economic exam. Economic growth will gradually pick up to something like 1.6 per cent of GDP and unemployment will edge down over the next couple of years from around 10 per cent to 9.7 per cent. But French problems are rooted in a sclerotic labour market, which has defects that are amplified by a public sector that is too large, inefficient, and crowds out the private sector. In short, the problems in France’s public finances aggravate its defective labour-market performance.

Public spending that crowds out the private sector

For many years, the European Commission, the research department of the ECB, and the OECD have offered advice that amounts to a clear and a simple message: spending needs to be reduced, borrowing needs to be cut, and labour-market regulation needs to be reformed. The ratio of General Government Expenditure to GDP is 57 per cent. France has one of the highest public-spending ratios in the OECD and results in a high tax burden to pay for it. If France is to escape from what the OECD, in its latest Economic Outlook, has described as its low growth trap, and to be able to achieve durable reductions in unemployment, taxes will have to be cut. A reduction in the tax burden will require public spending to be controlled by public policy reforms that are sustainable in the long term. The short-term exigencies used to bring the deficit down, such as general across the board restraint and a partial public sector wage freeze, will not deliver durable reductions in state spending. What is required is fundamental reform of the functions of the state and how those functions are carried out.

The need for comprehensive public-sector reform

A significant part of the public sector is inefficient, and public-sector productivity is held back by a failure to score spending priorities. The OECD has given France clear advice on this. Social spending needs to be better targeted, and the number of regional public-sector bodies that overlap and their functions need to be clarified and better focused. In practice, this means local-government reform, reducing the number of municipalities, and eliminating the overlap of policy responsibility between different levels of government.

Social spending needs to be better focused. French social spending is relatively high and rising. At over 30 per cent of GDP, it is probably the highest in the OECD. Spending on older households needs to be contained, and their effective retirement age needs to be raised, by aligning the unemployment benefits that younger workers and older households receive to reduce the incentive that older people have to leave the labour market prematurely. A re-ordering of the benefits would enable better support to be given to younger workers damaged as a result of unemployment. Education spending overall is in rough alignment with France’s needs, but the way it is spent does not match educational need. There should be greater support within French educational spending for weaker students.

Financial stability alone does not guarantee prosperity

Since 1983, French policy has shown that, while financial stability is a sine qua non for a successful economy in the medium term, it is not, alone, a sufficient condition for economic success. High levels of public expenditure and a heavy tax burden crowd out the private sector, and impede economic growth. Labour-market and product-market regulation raise costs, and hinder the operation of the economy as a whole. And France has a structural unemployment problem: unemployment remains high over the economic cycle because the cost of employment is high, and the economy cannot adjust to shocks, given that it is inflexible. President Mitterrand’s government in the 1980s and 1990s became the exemplar of financial orthodoxy, while perfecting micro-economic damage to the supply performance of the French economy.

High public expenditure and high taxation, in combination with inflexible labour and product markets, have resulted in disappointing economic growth, and rising structural unemployment. France has made systematic errors in micro-economic policy that cannot be corrected by macro-economic measures.

France’s labour market: the exclusion of outsiders

Employment costs, and the difficulty of adjusting employment to changing circumstances, result in a segmented labour market, where ‘insiders’ enjoy high wages, generous benefits, and can look forward to good pensions. These internal labour markets are hard to enter, and employers are reluctant to hire because labour is expensive, and difficult to let go, which makes employers picky about who they take on. Education, skills, training, and experience are prized; poor education and lack of skills and experience are penalised. This makes life tough for young people, people who find themselves out of work, and those who have some handicap in the labour market — such as a period of illness, being out of the workforce to look after a relative, or as a result of a period of imprisonment. Part of the political challenge in France today results from the social alienation that arises from the lack of employment opportunities.

Do the elites of the grandes ecoles help?

That alienation is also aggravated by a perception that a particular elite, exemplified by graduates from France‘s grandes ecoles, has been responsible for constructing institutions and policies that do not work, and appear to be maintained regardless of the occupants of the Elysee Palace and the Hotel du Matignon. Paradoxically, the two economics ministers who tried the most to reform the French economy were technocrats, appointed to office without ever having been elected: Raymond Barre in the 1970s, and more recently Emmanuel Macron — a candidate in this year’s presidential election.

What do the presidential candidates in 2017 offer, and how politically effective will they be?

The principal candidates on the centre and right — Emmanuel Macron and Francois Fillon — recognise the character of France’s economic challenge. It is not clear, however, that they have identified remedies that match the challenge. Fillon, a soi disant admirer of Margaret Thatcher, has described France as ‘bankrupt’, and promises to reduce the number of state employees by 600,000 in five years to fund €40 billon of tax relief for companies, in the context of a €2,181.1 billion economy, and a radical reform of the 35-hour work week. Macron promises 120,000 cuts in state employment over five years, and €60 billon of public expenditure savings. He envisages reducing the ratio of public expenditure to GDP by 3 percentage points. Macron invokes the Nordic model of fiscal discipline and public spending. Much of his programme would be a continuation of his work as President Hollande’s economics minister.

The real question may turn out to be whether any programme of reform would command a majority in the National Assembly. Marine Le Pen has set her party against the sort of reform programmes being explored by Macron and Fillon. The last word may well go to one of the politicians who Fillon defeated in the Republican primary: Alain Juppé dismissed Fillon’s agenda as ‘brutal’ and unworkable. The next president of France’s Fifth Republic will enter the Elysee Palace as the least powerful head of the French state since Rene Coty resigned in 1959.

Author

Warwick Lightfoot

Warwick Lightfoot
Director of Research & Head of Economics and Social Policy Read Full Bio

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