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France’s economic sickness might defy a cure

Not at the races. Lefteris Pitarakis/AP

France’s economic sickness might defy a cure

Not at the races. Lefteris Pitarakis/AP

The news from France has not been good over the last few years. Poor economic growth, stubbornly high unemployment, plant closures on the rise, strikes (not new, really), voter disenfranchisement and the rise of populism all paint the picture of a country suffering economic decline and political turmoil.

President Francois Hollande on Tuesday attempted to sketch out the latest bid to reverse this trend, but the structural flaws lie so deep, that the fear must be that his efforts will end up in oblivion as so many have done before.

Debt is approaching 100% of GDP, which although not far off US and UK levels is a grave concern given that a Greece-style bailout from the European Central Bank is simply not an option. Most telling though are the fundamental economic issues which helped prompt downgrades from ratings agencies, making it harder for France to raise money from the markets.

The poor performance of France relative to its peers is beyond doubt. The table below looks at the growth rate of GDP per capita over the period 1960-2009 and decade by decade. It displays the ranking of France and the UK among 24 OECD countries (excluding Korea and the Central and Eastern European countries). Over the whole fifty-year period, France comes in the middle of the pack, while the UK is at the bottom. But look at the evolution over time. France keeps sliding down inexorably while the UK, ranked last over the 1960s, shoots up to the top of the pack.

And it’s not just bad luck.

For thirty years now, the unemployment rate has hovered around 8%, and it has been around 25% among the young. The diagnosis is well known: the labour market is highly rigid, with redundancies difficult and costly, unemployment benefits which last for years, and generous welfare payments when these run out. One can live a whole life on the dole, and we now see a second generation of people who simply do not work.

The statutory minimum wage is so high that school dropouts cannot be employed at this rate. In the suburbs where they are concentrated, drug dealing and petty crime can be the norm. High unemployment, meanwhile, feeds an anxiety which means every parent wants their children to enjoy the job security of a public servant.

For the state is huge. It employs more than 20% of the working population on relatively high salaries with lifetime employment, short working hours and long vacations. And there is no meritocracy in the public sector; promotion is by seniority. Twenty years ago, France embarked on a decentralisation drive, adding more and more administrative layers. Each layer has built expensive office buildings and filled them with more employees to compete with the layers above and below, but taxes remain almost entirely national so the central government continues to dominate.

One could add a few more elements to the diagnosis. But the overarching conclusion is that France needs to be deeply reformed. No one doubts it. The French are clearly aware of their collective misfortune. The national media constantly debate how pessimistic the French are and there is much soul-searching about the state of the nation. Each President is elected by promising reforms, Hollande included. But reforms actually mean changing things.

No future in jobs for life

That includes taking away some of the myriad entitlements that French citizens and firms get from the state, be it jobs for life, protected trades, generous health protection, subsidies to large families regardless of income, or disguised subsidies to large corporations.

Attempts to eliminate entitlements are perceived as a potential threat to one’s own entitlement. In a country when the State spends 57% of GDP, the not-in-my-backyard syndrome soon brings any attempt at reform down in flames. France’s economic decline is the result of decades of governments that have done nothing, simply because it is too hard.

Rather you than me. Thibault Camus/AP

More broadly, French distrust of financial markets has continued. When the crisis erupted in 2007, President Sarkozy famously promised the end of “financial capitalism”. Hollande has announced that “finance is the enemy”. I would argue that, like most French people, both are closet Marxists, even though they would strongly deny it.

The reason is that the Communist Party was the largest one in postwar France and its members then colonized the ranks of schoolteachers. You actually learn in school that markets are bad. Coupled with a lasting Catholic tradition of lamenting the fate of the poor, this creates a national suspicion of markets, of successful – and therefore wealthy – entrepreneurs and of “Anglo-Saxon” capitalism. Promises of a “third way” have not borne fruit. Pragmatism is seen as surrender to foreign thinking; ideology reigns supreme.

The French believe that they co-managed the euro zone debt crisis with Germany. In fact, Germany made the decisions at every turn but was careful to make them look like joint decisions. This was enough for Gallic pride to support the austerity policies that delivered the deepest and longest-lasting recession ever in Europe. Crucially, though, a weakened France has not been able to challenge Germany’s pedagogic approach to key issues faced by the eurozone.

But let’s not get carried away. France may not be doomed.

To start with, the French enjoy a good life. The standard of living is high, a legacy of the roaring Sixties. Vacations are long and the work week short. The state offers (costly) protection for everything that matters (health, unemployment, housing, poverty alleviation). Good food, good wine and a nice climate do the rest, including driving a booming tourism industry.

And France still houses some leading multinationals in both the industrial and service sectors. Even if they move production and research & development abroad where it is easier to operate, they carry the flag and repatriate (some) profits. The two-tier education system struggles to teach kids from poor backgrounds how to read and write, but it produces a highly qualified elite that runs the state and corporations.

In short, France may never quite tackle that fat tail of necessary reforms, but in any event, it is enjoying a decline that is slow and sweet.