Hamish McRae: French need real choices in order to readjust

Economic View

So now France has to decide. In the run-up to the elections the financial markets have been remarkably apolitical, you might even say mature, in their assessment of the promised economic programmes of the two principal candidates.

On the face of it you have one, Nicolas Sarkozy, who has achieved a reasonable degree of financial discipline, with the fiscal deficit for the past year coming in at 5.2 per cent of GDP, a little lower than the target of 5.7 per cent.

By contrast the main challenger, François Hollande, threatens war on the world of finance. There is a fine ring to that: “… and if markets are worried, I will tell them here and now that I will leave them with no space to act”.

Both, in reality, are promising more austerity. Both say they will achieve a balanced budget, Sarkozy by 2016, Hollande by 2017, and if that were to happen it would be the first time since 1979. The long deterioration in French national finances is shown in the main graph – the UK, notwithstanding present troubles, was in surplus at the end of the 1990s. But now all governments in Europe, one way or another, are planning to get back to balance. So France in a sense is merely one more member of the austerity club.

The markets recognise that. The issue is not willingness to deliver sustainable finances; it is the ability to do so. Here France is in a middle band. It still has full access to the financial markets to cover its deficit but it has to pay a premium over the rate paid by prime borrowers such as Germany or the Netherlands. That premium has jumped about in recent months and, as you can see from the right-hand graph, is currently around 1.2 percentage points for 10-year money.

But the recent rise should not be attributed to fears of being “left with no space to act” following a Hollande victory in the second round. It is part of a more general bout of jitters concerning the stability of the entire eurozone.

So the most interesting issue raised by these elections is not whether the country is going to get more austerity. There is no real question about that. Rather it is how France will be nudged in the longer-term towards a more substantial redefinition of the relationship between the state and the people.

If you stand back and look over the past 30 years, France has in most respects been an economic success story. It has grown at pretty much the same pace as the rest of Europe. It has sustained high quality public services for the majority of its people. It has a clutch of competent and successful large companies. And it retains high-quality craft service and manufacturing industries. It also, in terms of output per hour worked, has the highest productivity in the world.

There are, however, two clouds, two aspects of the economy that have become increasingly evident as a result of the recession. One is unemployment, currently just under 10 per cent – the highest for 12 years. But France has had unemployment above 7 per cent since the early 1980s – except for a couple of brief periods it has been above 8 per cent since then.

This is a manifestation of the “insider/outsider” aspect of the French economy. And it is not just first and second-generation immigrants who find themselves excluded from the mainstream labour market; many well-educated young move abroad for jobs too.

The UK has been the principal beneficiaryof this trend. Estimates range from 250,000 to 400,000 for the number of French people living here, the majority having come for work. A similar number of Britons live in France but the majority of those are retired. More than 100,000 French live in Germany and some 90,000 live in Belgium, with roughly the same number living in Switzerland. Part of the drivers of this trend seem to be taxation, but the wider range of job opportunities available abroad are also a key lure.

The other cloud is the sustainability of the French model. You cannot Frenchneedreal choices in order to readjust go on piling up public debt as France has for the past 30 years. If you take debt as a whole, France actually has lower levels than the UK, for consumer and mortgage debt is higher here. So it is not debt as such that is the problem. It is the scale of the public sector debt and hence the role of the state.

An economic model that has 56 per cent of GDP spent by government, the highest of any large country anywhere in the world, requires very high levels of taxation. Even the French do not seem prepared to pay that amount of tax, as evidenced by the numbers that have chosen to work abroad. So something has to give, but when?

That seems to me to be the most interesting issue of all. As France ages, and as it resists increasing the state retirement age (Hollande promises to cut this back to 60), the public burden will continue to rise. You can always push things forward a year or so, as France has been doing for a generation. Relatively favourable demographic trends buy the country more time than, for example, Germany or Italy. (Italy’s population is forecast to drop from its present 57 million to 41 million by 2050.) But at best France will have a stable workforce, rather than an expanding one, paying for an ever-growing army of pensioners.

Someone, some political leader, will have to take the French people along this path of adjustment. If the debate is framed in terms of anonymous and greedy financiers pitted against the French way of life – the markets versus the people – then it is hard to see a happy outcome. If, however, the French were presented with the real choices of a low retirement age but poorer pensions, and lower taxation of working people and leaner public services, then they could make whatever choice they feel is right for them.

Ultimately, the people, not the markets, make these decisions. But the markets can and do bring matters to a head when savers become worried they won’t get their money back.

VAT and National Insurance paint the best picture of recession

The most awaited economic information this week will be the first quarter GDP figures, for were they to be negative there would be a flurry ofstories about Britain being back in recession.

Technically that would becorrect as the estimates for the final quarter of last year were negative. Actually, it is more likely that growth will have been seen to have resumed,particularly since there were some very strong retail salesfigures for March ... the result it seems of the good weather, if you can remember that.

But the big point is to takestatistics with a healthy dose of suspicion and the more these rely on estimates, the larger the dose. Thus last week's unemployment figures saw some downward revisions in thenumber of jobless.

There seems to be a general bias towards underreporting growth. The official figures were still showing the economy in decline when, actually, we were out of recession and the 2010 figures greatly underestimated growth that year. But we should not assume the numbers will always be too glum and I am a bit suspicious of those good retail sales.

If you want to know what is really happening, the numbers you should take most seriously are VAT and National Insurance receipts. VAT tells us how much money is being spent and National Insurance gives a good fix on what people are earning.

If both are OK we can relax; if they're not, we all need to worry.

Life and Style
tech

Sales of the tablet are set to fall again say analysts

News
A Brazilian wandering spider
news

World's most lethal spider found under a bunch of bananas

Life and Style
fashion

British supermodel and hitmaker join forces to launch a 'huge song'

Sport
Mario Balotelli pictured in the win over QPR
footballInternet reacts to miss shocker for Liverpool striker
PROMOTED VIDEO
News
people
Voices
Sol Campbell near his home in Chelsea
voices
News
i100
News
Kimi the fox cub
newsBurberry under fire from animal rights group - and their star, Kimi
Sport
Fans of Palmeiras looks dejected during the match between Palmeiras and Santos
footballPalmeiras fan killed trying to 'ambush' bus full of opposition supporters
Arts and Entertainment
filmsIt's nearly a wrap on Star Wars: Episode 7, producer reveals
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

IT Operations Manager - London - £55,000

£50000 - £55000 per annum + bonus + benefits: Ashdown Group: IT Relationship M...

Day In a Page

Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album
Hugh Bonneville & Peter James: 'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'

How We Met: Hugh Bonneville & Peter James

'Peter loves his classic cars; I've always pootled along fine with a Mini Metro. I think I lack his panache'
Bill Granger recipes: Our chef's heavenly crab dishes don't need hours of preparation

Bill Granger's heavenly crab recipes

Scared off by the strain of shelling a crab? Let a fishmonger do the hard work so you can focus on getting the flavours right
Radamel Falcao: How faith and love drive the Colombian to glory

Radamel Falcao: How faith and love drive the Colombian to glory

After a remarkable conversion from reckless defender to prolific striker, Monaco's ace says he wants to make his loan deal at Old Trafford permanent
Terry Venables: Premier League managers must not be allowed to dictate who plays and who does not play for England

Terry Venables column

Premier League managers must not be allowed to dictate who plays and who does not play for England
The Inside Word: Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past

Michael Calvin's Inside Word

Brendan Rodgers looks to the future while Roy Hodgson is ghost of seasons past