The debate in France over the merits of economic austerity and reform reflect concerns felt across Europe.

1. COUNTRY FOCUS
12 Autumn 2014
France is the world’s sixth largest economy, the most visited country for tourism and the epitome – through its food, arts and culture – of the European way of life. France, it appears, has it all. However, amid stagnant economic growth, it is also grappling with some of the most testing economic policy questions of the time, and for the moment is struggling to come up with the answers.
After two flat years, French growth came in at zero percent in the second quarter, as stronger domestic demand was offset by weaker foreign trade. Markit PMI data for the manufacturing sector in August came in much weaker than analysts had expected, falling 1.3 points to 46.5 and remaining well below 50, the number that distinguishes expansion from contraction. Investors view of French risk reflects economic concerns and France five-year CDS were trading at 42bps in late August, compared with 20bps for the UK and for Germany, according to Markit data. Inflation is also dangerously low, with the CPI dropping 0.3% in July from June, leading to concerns over deflation.
Political toils
The gloomy economic outlook has led to political fallout, and at the end of August French President François Hollande ordered his prime minister to form a new government excluding socialists who had demanded an end to austerity policies supported by Germany.
The move followed a political crisis sparked by the resignation of economy minister Arnaud Montebourg, who had attacked Hollande’s economic policies and Germany’s “Kafkaesque” oversight and “obsession with austerity”.
The row in France exemplifies a wider debate in Europe about whether fiscal austerity aimed at bringing debt under control is the right policy at a time of economic stagnation. On one side is Germany, which advocates rapid deficit cutting to a target level of 3% of GDP, and on the other are the weaker European economies, of which France is the most important.
German meddling?
In the eyes of some French politicians on the left, not only is Germany’s insistence on budget cuts incomprehensible, it is also irksome, because German austerity is by some arguments the cause of slow growth elsewhere in Europe. The German economy ran a current account surplus of €206bn in 2013, equating to 7.5% of gross domestic product, suggesting that Germans are keener to hoard their hard-earned wealth than spend it, a problem recognised by the US government.
“Within the euro area, countries with large and persistent surpluses need to take action to boost domestic demand,” says a US Department of the Treasury report published last October. “Germany’s anaemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment.”
The debate in France over the merits of economic austerity and reform reflect concerns felt across Europe.
David Wigan reports.
French lessons
6th
France is the world’s sixth largest economy.

2. COUNTRY FOCUS
13
Autumn 2014
Still, not all of France’s problems can be placed at Germany’s door. A key plank of Hollande’s strategy of cutting the budget deficit has been high tax increases, and the overall tax take has risen from 44% of GDP in 2011 to 47% in 2014, with companies hit hard. In one example, a temporary surcharge of 5% of corporate tax paid by companies with annual turnover of more than €250m implemented in 2011 was increased in 2014 to 10.7%.
High payroll taxes
French business, meanwhile, is burdened by the developed world’s heaviest payroll tax of 43%. As a result, companies are loath to take on too many employees. In addition, the high cost of firing workers also make French firms less keen on hiring. Businesses in the UK pay a payroll tax of around 11%, and those in the US pay as little as 5%.
France is currently implementing the steepest spending cuts for four decades, comprising a €50bn reduction over three years, which if successful will reduce the annual rise in public spending from 1.3% in 2013 to 0.1% in 2015. However, officials said in August the country would miss its end-of-year deficit target of 4% of GDP (after posting 4.3% in 2013), and made it clear that growth would not be sacrificed at the altar of excessive cost cutting.
And while some of France’s problems are economic, others are structural. French socialism has its origins in the revolution of 1789, and grew out of the Paris Commune and the subsequent birth in 1880 of the French Workers Party. Nowadays “les partenaires sociaux”, or unions, have just 10% of workers as members (far less than in the UK or the US) but wield considerable power. Any potential policy change can mean strikes and workers taking to the streets in their thousands. Meanwhile, regulated professionals such as taxi drivers, notaries and pharmacists were accused by financial watchdog Inspection Générale de Finances (IGF) in a July report of running closed shops and charging disproportionate fees.
Active state
The French state maintains an active role in the economy, holding stakes in major companies such as carmaker PSA Peugeot Citroën, in which it bought a 14% stake in March, and telecoms provider Orange.
Concern over France’s entrenched ways of working has led to a bout of soul searching, and in April 2013 the French news magazine Le Point ran an article headlined ‘Are the French lazy?’ The answer was a resounding ‘yes’, with the French working shorter hours, retiring earlier and taking more holidays than people in other European countries, the magazine said.
Of course many in France argue that it has the balance right, and that the freedom obtained by the country’s workers are what sets it apart from the ‘survival-of-the- fittest’ Anglo Saxon economies, which it should not be forgotten were the source of the global financial crisis. No French bank collapsed in 2008. Further, France has world class companies in the automotive, aerospace and railways sectors, as well as cosmetics, luxury goods, insurance, pharmaceuticals, telecoms, power, defence, agriculture and hospitality. Also, the French have higher life expectancy than both the British and Americans.
All of which gives an indication of why the current economic debate in France, and across Europe, is about more than just the economy.
Within the euro area, countries with large and persistent surpluses need to take action to boost domestic demand.
€50bn
France is implementing steep spending cuts, comprising a €50bn reduction over three years.