French trauma is a problem for all of Europe

ECONOMIC VIEW

Is this principally a French problem or is it a wider European one? Yesterday the continuing mayhem in France started at last to spook the financial markets - which had hitherto been remarkably calm in the face of the growing unrest. That sanguine view has gone, and if anything the sharp downgrading of the franc and franc-denominated securities may overstate the actual deterioration that has taken place. There were plenty of reasons to be concerned about the French economy ahead of the strikes and it is not at all clear that these concerns should be any greater now than they were a couple of weeks ago before the strikes took hold.

Understandably, perhaps, the markets seem to be seeing the difficulties mainly in French political terms. By downgrading French bonds yesterday they were suggesting implicitly that French fiscal policy will have to be relaxed to meet the demands of the strikers. In the sense that the new cabinet's deficit-cutting plans were tighter than was absolutely necessary to meet the Maastricht criteria, some rise in the projected deficit ought to be acceptable to the markets. But since any easing represents a defeat for the plans of Mr Juppe's new cabinet, the question of "who governs France?" springs out. Investors do not mind the odd billion of extra borrowing, but when people start rioting they take fright.

But to see the French difficulties in French terms - as one of the periodic clashes that occur between the elitist government and the ordinary people - is to miss a wider point. On a short-term view this is indeed a French problem. But on a longer-term perspective it is a pan-European one.

Some numbers. The French budget deficit next year will be a little over 4 per cent of GDP, but not more than 4.5 per cent. In 1997 the latest plans would in theory bring it below 3 per cent, but even on pessimistic assumptions the deficit will be about 3.5 per cent. True, unemployment at more than 11 per cent is high, but the current account surplus is equivalent to about 1 per cent of GDP, and inflation is very low.

These numbers are not so dissimilar to those of other European nations. The fiscal deficit and unemployment are poorish, but the current account and inflation are good. At the trough of the recession Britain's fiscal deficit reached 7.8 per cent of GDP, while France's peak was 6.1 per cent, so the French correction is smaller than our own. Even were France to run a deficit of 4.5 per cent of GDP next year that would be better than Italy, Spain, Sweden, Greece and Portugal, and much the same as Belgium. Overall debt is in the middle of the industrial country range.

The problem is not so much French finances now; rather it is what might happen in the next 15 to 25 years. At the moment France has just over 14 per cent of its population over the age of 65; by 2010 it will be about 17 per cent, and by 2020, 20 per cent. But this is pretty standard. Italy is similar to France, but in Germany the corresponding percentages are 16, 20 and 22 per cent. A pensions system which just about functions now - only "just about" because social security contributions are already one of the main factors making it uneconomic to employ French workers - cannot function in 15 or 25 years' time.

But this is exactly the same problem that every Continental European economy faces: the pincer movement between a rising number of retired people and high social security commitments that have to be funded by a smaller group of people of working age.

In one sense the present Juppe plans are tighter than necessary, in that they are cutting back the fiscal deficit faster than the markets require in order to meet the politically inspired Maastricht criteria. But in another sense they are not tight enough, in that France and all other Continental European countries face a series of similar austerity packages - cut-backs to their welfare budgets, higher taxation - which will have to take place again and again through the next 25 years.

At one level this is a clash between rulers and ruled: that is a particularly French problem, for while the gulf exists elsewhere it is perhaps widest in France. But at another, more important, level it is a clash between demographic groups: the middle-aged and old, who expect to receive the social benefits they have been promised; and the young, who either face the prospect of taking home a smaller proportion of their earnings, or are excluded from the workforce altogether.

This does come back to France in one sense. The French government is in the same position as other European governments: it has to persuade an electorate that is increasingly numerically dominated by over-55s that expectations must be downgraded. That the government has so far proven unsuccessful suggests that the process of persuasion will be more difficult in France than in, say, Germany, where demographic pressures are actually greater, or Italy, where the fiscal starting point is worse.

But we cannot be certain of that. It may actually prove harder to explain to voters in Germany and Italy that the politicians can't keep their promises. This disruption in France may look like a re-run of the French past, the events of 1968. But it may be more a foretaste of the Continental future, as Europe cuts its governments back to size.