French Are Clueless About the Economy

For the past 10 years, France has had one of the highest levels of public spending in the world

By Judith Sloan

I'VE made the point before - I have a fraught relationship with France. What's not to love about boeuf bourguignon, the Riviera and Sancerre white wine? And how good are tarte tatin, the Musee D'Orsay and Carcasonne? (OK, Carcasonne is a bit tacky these days.)

But when it comes to running an economy, let's face it, the French have no bleedin' idea.

Let me pose this question: when did the French government last run a budget surplus? Here's a hint: Wyatt Roy's parents were still at school and probably didn't know each other. The answer is 1974-75.

But, boy, do they know how to run budget deficits, as the chart shows. Deficits in excess of 3 per cent of GDP are common. More recently, we have seen budget deficits above 7 per cent of GDP. The government sector in France accounts for more than half of total output and government debt is running at 90 per cent of GDP.

If you are a fully-signed up member of the Keynesian school of thought, the expectation is that, with all that continuous pump-priming, the French economy should be going gang busters. But, alas, the opposite is the case.

Unemployment in France is 10.6 per cent and rising. Youth unemployment is just over 25 per cent. The French economy is flat-lining, having been in and out of recession for the past four years.

So how did it come to this and what are the solutions to France's economic woes?

One of the strange features of the French economy is that the country has produced world-class companies, including L'Oreal, Michelin, LVMH, Total, AXA and Alcatel-Lucent. Once upon a time, French banks were admired - they were specialists in the provision of trade credit, for instance - but their reputation and fortunes have taken quite a battering in recent times.

But the short explanation for France's dreadful overall economic performance is the combination of an excessively large government sector, ill-directed spending, badly designed taxes and stifling regulations, particularly affecting the labour market. The current Labour Code runs to more than 3000 pages!

If you think I am alone in this assessment, consider some recent comments from Christian Noyer, the governor of Banque de France, the country's central bank. (I think I might have developed a bit of a crush on him, even though he is French.)

Writing recently, Noyer argued that: "The underlying objective is growth. Not just a temporary spurt, sustained artificially by public spending, but strong and lasting growth that creates jobs and is based on the development of modern and competitive production capacity. This kind of growth cannot just be summoned up. It requires a profound change in public policy." He's my kind of man.

"For the past 10 years, France has had one of the highest levels of public spending in the world. Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence. For this reason, trying to stimulate growth through a spending binge is bound to be counterproductive. Businesses and households, anticipating higher future taxes to pay for the binge, will cut back, offsetting any boost from deficit spending." The only quibble I have is the inclusion of the adverb "probably".

On France's inflexible labour market, Noyer states that France "is one of the biggest spenders on employment policies in the developed world, but it still has one of the highest levels of unemployment".

He then poses this question: "Do these subsidies not serve to offset market rigidities that could in fact be addressed directly at a lower cost and with more effective results?" He makes specific mention of the capacity of German firms to reduce working hours when economic conditions soften which contrasts with the restrictions that apply in France.

Acknowledging the changing nature of the labour market, Noyer argues that "public policies are often overly concerned with preserving the jobs of the past, at times to the detriment of future job creation. Today's jobs are not the same as those of yesterday and, likewise, those of tomorrow will be different from the jobs that exist today".

The Australian government might care to take note.

Just to prove that Noyer is not a lone voice on this issue, consider this 2009 quote from Christine Lagarde, when she was France's finance minister, but is now chief of the International Monetary Fund. "Instead of thinking about their work, (French) people think about their weekends, organising, planning and engineering time off. If you say to a French person, 'Would you like to be an entrepreneur?' all they do is run scared."

So what are the features of the rigidities that afflict the operation of the French labour market? Extremely high minimum wages, restrictions on the ability of firms to reduce the number of workers, excessive redundancy payments, and the list goes on.

There have been a number of high-profile cases that illustrate the lunacy of French labour laws. Take the example of the Goodyear's loss-making tyre factory in Amiens. Earlier in the year, the company announced it would be shutting the plant and cutting its workforce in France because of "industrial disputes and plunging car demand in Europe".

A potential sale of the plant to US company Titan International was on the table until the chairman of the company visited the plant: "I have visited the factory several times. The French workforce gets paid high wages but works for only three hours. They get one hour for breaks and lunch, talk for three hours and work for three. I told the French union workers this to their faces. They told me that that's the French way!"

The trouble is that the French way does not provide a conducive environment for investment and risk-taking. Without some radical changes to the Labour Code - there have been some minor modifications - and other major changes involving a smaller government sector, the outlook for the French economy is grim.