Hamish McRae: There has always been tension between France and the UK – but we face the same practical difficulties
Economic View: The only comparable region in terms of overall spending is Scandinavia
Thursday 16 January 2014
Will the economic reforms outlined by François Hollande really revive the French economy? Well, they just might. We have had only the barest sketch of the new business-friendly programme and the market response so far has been pretty muted. But the package comes at the right time, for as the measures feed in over the course of the year they will support what already looks like a modest recovery.
There is always tension between the UK and France – socially, culturally and politically, as well as in economic terms. So here, the strong recovery now evident in Britain is being contrasted with the flat performance in France; while there, our deep recession and the reliance on domestic demand to pull us out is contrasted with what was until recently a reasonable recovery.
You can catch some feeling for this in the graph, which shows published GDP figures for the two countries, together with those for the US and Germany.
Initially they did much better than we did, but recently we have been closing the gap. On the basis of this, France has had a better overall performance than the UK – though anyone familiar with the data will be aware that the UK official figures are suspect, as they are undercounting the recovery. (Job creation has been far stronger in the UK than in France and actually stronger than the US, too.)
However there are two broad strands helping France. One is that the eurozone is at last picking up a little pace.
To over-simplify, the fringe economies that have been pulling down the entire edifice are, with one exception, now showing signs of a turnabout. The exception is Italy, where there is really no evidence of growth at all. But Spain, Portugal, Ireland, even Greece, are all increasing their exports, the sign that they have regained some competitiveness. As for Germany – well, it continues to plod forward slowly, pulling along the others with it.
The second strand is that the structure of the French economy is stronger than many outsiders appreciate.
There are well-known weaknesses, such as the country's mass car producers, with Peugeot in particularly serious trouble, but less attention has been paid to the country's commercial success stories, which include the luxury sector.
Part of the reason why Paris has been more successful than London at attracting Chinese visitors is the difficult of getting UK visas, whereas a Schengen visa gives the visitors access to nearly all the continental EU, but part is the reputation of up-market French brands.
As a result France exports a slightly higher proportion of its total exports to China than the UK, though we are both quite a lot lower than the proportion of exports that go there from the US and Germany.
Indeed, if you look at the overall structure of the French and British economies, they are really very similar. They include a not very big manufacturing sector, massive private sector services, a large public sector, strong overseas investment… and so on. French agriculture is a bit bigger than ours but is still only 3 per cent of GDP. The rhetoric is that we are very different; the reality is that we are much the same.
There are, however, two notable differences, and these are relevant when trying to assess these new reforms. One is that while we have a large public sector, rather larger than the OECD average and larger than socially similar countries such as Australia and Canada, France is a real outlier, with the largest public sector of any major developed country. The other difference is that France has an unusually highly regulated economy, with some professions and categories of workers enjoying special protection, creating insider/outsider divisions.
As far as the first is concerned, up to now the French electorate has been willing to pay much higher levels of taxation than elsewhere. As a result their fiscal deficit is currently a bit over 4 per cent of GDP, whereas we are still at 7 per cent.
However the only comparable region in terms of overall spending is Scandinavia, and whereas taxes and spending there have tended to decline over the past 20 years, in France they have continued to rise. It is that trend that President Hollande is seeking to reverse.
As for regulation, that too is an issue the president has promised to tackle. The result of French restrictions on hiring (and the policy of a 35-hour week, now relaxed) has been to push up productivity.
The result is not just that French workers have to cram their work into shorter hours; less productive workers are crowded out of the jobs market. So there is a link between the fact that the French economy has the highest productivity per hour worked of any country, higher even than the US, but it also has among the highest unemployment rates.
People in secure jobs naturally resent the idea that others, young people entering the job market or immigrants, might undercut them.
The practical difficulties facing reform have been highlighted by the regulation required of mini-cab firms in Paris that they have to wait for 15 minutes between a call coming in and being able to pick someone up. The idea is to protect conventional taxis. The effect is to make it harder for people to use the alternative service.
Perhaps the most interesting issue is whether France is really prepared for substantial market reforms. If so, it may be easier for a government of the left to deliver these than a government of the right.
There are parallels with the reforms of another François, François Mitterrand, who became France's first socialist president in 1981, and with Gerhard Schröder, who became the SDP chancellor of Germany in 1998. Both resisted market reforms but were forced, by rising unemployment, to adopt them.
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