France has been ignoring its problems, now the chickens are coming home to roost

France has been ignoring its problems, now the chickens are coming home to roost

It is too early to be sure that the UK economy is finally emerging from the doldrums but the early signs look promising.

In France, government spending accounts for 56pc of GDP, the highest in the eurozone. Photo: PA

By Roger Bootle

10:33PM BST 19 May 2013

By contrast, last week’s news from the eurozone was dire. Q1’s drop of 0.2pc in GDP was the sixth successive quarterly contraction. It included the second successive drop for France, thereby formally putting it in recession.

Throughout my career, I have been fascinated by France and especially by the question of how, given its anti-business culture, it has managed to do so well. I have never solved the riddle to my full satisfaction but I have concluded that, when a country is on the wrong path, it may take a long time for this to show up unambiguously in its economic performance.

Moreover, France has successfully bottled up its problems, thanks to a large and powerful state and the practice of closet protectionism.

In France, government spending accounts for 56pc of GDP, the highest in the eurozone. To an extent that would be unthinkable in most other countries. Consumers, businesses and government operate a buy-French policy on just about everything from wines to cars. The result is that the effects of a loss of competitiveness can be disguised. But now the chickens are coming home to roost.

Since the euro was formed in 1999, German unit labour costs have risen by only 10pc. At the peak, Greek, Irish and Spanish costs were up by 62pc, 53pc and 43pc respectively. But these countries have since managed to reduce their unit costs so that the equivalent figures are now 41pc, 30pc and 28pc. Meanwhile, French costs have continued to rise. They are now up by about 30pc since 1999, putting France in the same position as Spain and Ireland.

What’s more, France’s share of world exports stands at about a half of what it was when the euro was formed. And export prospects don’t look good, not least because France is heavily dependent upon the weak peripheral economies, which take about 20pc of her exports, compared with only 13pc of Germany’s. Admittedly, the employment picture is not as bad as in Spain or Greece. But it is still pretty terrible. The unemployment rate is 11pc, compared with 5.4pc in Germany. Over the past two years, the UK has created more than 400,000 jobs, while France has created fewer than 90,000.

None of this is surprising when you consider what French employers have to put up with: the 35-hour week, “social charges” of about 50pc on top of wages, employment protection legislation, which makes it almost impossible to sack anybody, high levels of industrial action and punitive personal taxation. Every non-French business person I know with operations in France says what a nightmare it is to do business there.

The fiscal position also looks pretty serious. Its debt ratio is already on course to hit 95pc of GDP this year. Admittedly, the fiscal deficit is only 4pc of GDP, just about the same as Italy’s, but Italy’s deficit is more than accounted for by interest payments. If France had to pay Italian interest rates then its deficit would be 6pc of GDP.

Meanwhile, French banks are seriously weak, with large exposures to the sovereign debts of the European periphery amounting to about 15pc of French GDP.

Yet all this need not be fatal. Only 14 years ago, Germany was described as the sick man of Europe. But far-reaching reforms under Chancellor Schröder restored it to health.

The trouble is that there is no sign of reforming zeal in France. Indeed, the French government has moved in the opposite direction. It has even reduced the retirement age just when other governments are increasing it. And France has a tradition of ungovernability. Getting tough reform through is not just a matter of difficult electoral politics but also of winning battles on the streets. French governments have a habit of bottling out.

Despite the seriousness of this situation, the French establishment’s eye is not on the ball. It thought that monetary union would unleash a wave of prosperity. Some hope! It now seems to think that completing the monstrous building that is the euro will somehow fix the dodgy foundations underneath. But unless France acts boldly to reform its economy, and particularly its labour market, then even the achievement of full fiscal and political union would still leave its economy languishing.

As the performance of the Italian Mezzogiorno attests, just because you are united with a prosperous region does not necessarily mean that you too will prosper. Indeed, it may mean exactly the opposite.

So much for being part of the tough northern core. Increasingly, France looks part of the soft southern underbelly. As the French position worsens, the markets would do well to ponder the implications. When the next dollop of bail-out money is required, will France be in a position to accept her share? And if not, will Germany accept the necessary increase in hers?