François Hollande offers little to assuage the fears of those who think France is the most vulnerable country in the eurozone
More Harold Wilson than Margaret Thatcher. A social contract rather than capitalism red in tooth and claw. Such was François Hollande’s pitch to the French people and the financial markets as he outlined his plan to reinvigorate the eurozone’s second biggest economy.
The backdrop was familiar to students of British politics in the 1970s: rising unemployment, weak growth, a disaffected business community, low productivity and high taxes. Hollande did not use the phrase but everybody knew the subtext of his address: France is now seen as the sick man of Europe.
Hollande’s solution was to offer French business a deal. Public spending will be cut by €50bn (£41.5bn) and the use of state resources made more efficient. Red tape will be cut. The social costs that businesses face will be cut by €30bn. But in return, firms will have to expand their workforces, guarantee to offer decent wages and provide better training. Back in 1982, Hollande’s socialist predecessor François Mitterand performed a screeching U-turn when he replaced Keynesianism in a country with a strong franc policy. This was not one of those moments. Instead, it was a warning that France could be an economic backwater in a decade’s time, coupled with some modest proposals for putting things right. There was little to assuage the fears of those who think that France, rather than Italy or Spain, is the most vulnerable country in the eurozone.
Hollande has three interlocking problems. Problem number one is that France is becoming less competitive within the eurozone and the wider global economy. Business costs are high and productivity is weak. France’s industrial base has been subject to less hollowing out than Britain’s but the recent deterioration in the French trade deficit tells its own story.
In the postwar decades, the solution would have been to devalue the franc so as to make French exports cheaper. But problem number two is that membership of the single currency has ruled out this option, and France has been finding life inside the single currency a slog. Monetary policy has been too restrictive for France’s needs, particularly given the heavy exposure of its banks to the crisis-ridden countries of southern Europe. Credit growth has been depressed, while the recent hardening of the euro has not helped matters. Paris has been putting pressure on the European Central Bank to provide more stimulus, so far to no avail.
As a result, France has yet to recover all the output lost during the great recession of 2008-09 and after a short-lived recovery from a double-dip recession now appears to be at risk of stagnating once more. Unemployment at 10.8% is double the level in Germany and a quarter of those aged under 25 are out of work. Departure from the euro is not an option unless the single currency implodes, something that looks only the remotest of possibilities. But if the euro were to split into a hard core with Germany at its heart and an outer core of struggling nations, most economists would see France as a likely candidate for the second group.
Germany faced a similar challenge in the early years of monetary union. It responded by pushing through some painful reforms to its labour market and to welfare provision. Real incomes of German workers were cut over several years in order to bring down costs, improve profitability and make the economy more competitive internationally. Thatcher imposed the same sort of regime in Britain in the 1980s, although less consensually.
Hollande’s third problem is that there is no stomach in France for a German-style package of reforms, nor has there been a deep-enough crisis to make a Thatcherite approach politically sellable. France has many things going for it: an excellent health system, much better infrastructure than Britain; a way of life (for those in work) that is as good as anywhere in the world. There is no appetite for wrenching change. Hence, the small-scale, incremental nature of Tuesday’s reforms and the way in which they were packaged. According to the president, it is possible to make savings without a slash-and-burn approach to public spending.
A committee of the great and good will be established, in classic French fashion, to oversee public spending to ensure the savings do not turn the country into an imitation of the US. Instead, the model is Sweden, a country that has high levels of tax and public expenditure but has a better growth record and lower unemployment than France.
But Sweden is not a member of the euro and is able to run its own independent economic policies. France therefore has a pretty stark choice: implement structural reform or do nothing and hope that something comes up. For all the familiar reform-or-die rhetoric, Hollande is firmly in the Mr Micawber camp.
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