This is the title of an important, must read analysis of the French economy by Simon Tilford, Deputy-Director of the Centre for European Reform in London—the leading think tank focusing specifically on the European Union—, posted September 24th on CER’s website. Tilford’s analysis thus begins
The French government’s announcement in early September that France would fail to bring its deficit below 3 per cent of GDP until 2017 was met with the usual mixture of frustration and resignation. Many eurozone policy-makers see France’s refusal to play by the fiscal rules and its inability to reform its economy as the biggest threat to the eurozone’s stability. The list of allegations is pretty comprehensive: a bloated state, a lack of competitiveness, intractable structural problems and a mulish refusal to reform or to acknowledge that globalisation has left France living on borrowed time.
Some of these criticisms have merit, but as a whole they form little more than a caricature. France has some supply-side problems: very high non-wage labour costs deter employment; and parts of the service sector urgently need an injection of competition. But these are secondary to those of its problems that stem from self-defeating austerity and chronically weak domestic demand elsewhere in the eurozone. Without change to the latter France could yet come to justify the ‘sick man of Europe’ tag so beloved of journalists.
Further down Tilford says
To recap, the French economy is in trouble. It has barely grown for the last two years and unemployment is stuck at near record levels. But France has performed pretty well in a eurozone context. It stacks up favourably not only compared with the currency union’s periphery but also with the likes of the Netherlands and Finland. France’s supply-side problems are no doubt significant, but do not justify its status as some kind of hopeless case. They are certainly not as serious as those faced by Italy, and arguably no worse overall than those of Germany and the UK, although they are in different areas. Nor will France’s economic prospects be improved by adhering to the European Commission’s calls for austerity, wage restraint and labour market reforms which, if heeded, would exacerbate unemployment.
And he concludes
The French government should certainly push ahead with structural reforms of its economy, but not necessarily those prescribed by the European Commission. When demand is very weak and firms do not need to hire workers, reducing social protection and wages increases unemployment rather than reducing it, and depresses consumption. However, France should reduce the burden of taxation from labour and transfer more of it to wealth, property and carbon consumption. And it should open up the country’s non-tradable services sector to greater competition. But even structural reforms of this kind will do little to increase economic growth without a change to fiscal policy, aggressive measures by the ECB to reflate the eurozone economy as a whole and concerted action by the German government to rebalance Germany’s economy.
France is not the ‘sick man of Europe’, but it is certainly ailing thanks to the medicine prescribed by Brussels and Berlin. The French government needs to step up its resistance. Indeed, perhaps the most serious charge that can be laid at France’s door is that it has meekly gone along with a eurozone policy doctrine that has done so much damage to the French economy rather than corralling opposition to it and forcing through a change in direction.
As an 1800 word article can’t cover all the bases, there were a few problems in the French economy Tilford didn’t mention, e.g. underinvestment by French enterprises in R&D (only 1.4% of GDP), a relative paucity of SMEs—which are a strength of the German economy and a source of innovation there—, and inefficiencies in the distribution system (i.e. superfluous layers of middlemen taking their cut, resulting in a price structure that is higher than it should be, and certainly more so than in Germany). But Tilford’s Krugman-like analysis is very good and salutary nonetheless. Read the whole thing here.