France 2014: La Meme Chose

January 7th, 2014
in Op Ed

Written by

Turn-of-the-year commentaries of France have all been deeply pessimistic, seeing France as mired in high unemployment, an economy that has barely shown any signs of growth for the past three years, a government that has never been as unpopular in living memory and a political system suffering from a chronic inability to deliver the kind of reforms that might shake it out of its sloth.

Follow up:

But President Francois Hollande caused an uptick in speculation that at last he might be thinking of big changes that could give the economy the lift it so badly needs in his new year televised message to the nation, in which he called for a pact of responsibility by which the government would reduce tax and similar costs on businesses if the businesses would agree to increase employment.

On the face of it this sounds attractive. The country is suffering from record unemployment, just 5,000 short of 3.3m "registered unemployed" in November, which is about 11.5 % of the second quarter labour force, but the official unemployment rate, based on a labour market survey, is 10.9 %.

It is true that unemployment is no long rising and may even be leveling off, but this is chiefly because the government has shifted at least 100,000 unemployed persons, most of them under the age of 25, into assisted jobs, mainly in the public sector.

There has been no recovery in employment in the market sector of the economy, with the numbers down again in the third quarter.

On the other side of the coin, gross operating profits, as measured in the national income accounts, are much lower in France, at just under 28 % of GDP in the third quarter, than in most other European countries, including Germany where the level is about 41 %.

This is regarded as one of the key weaknesses of the French economy, as low profits act as a brake on the investment that is needed to generate growth in output, productivity and employment.

The economy has barely grown for the past three years, although real GDP is expected to increase by about 0.2% in 2013. The government forecasts an increase of just under 1% in 2014, which would not be enough to make an impression on unemployment, as INSEE, the official office of statistics, noted in a December economic survey.

But as details of what President Hollande has in mind begin to emerge, it appears that however good the intentions the president may have, the changes he has in mind will be modest.

This will no doubt appease opinion on the left wing of the president's Socialist Party, which took the new year message to mean that the president was adopting the kind of social liberal politics, which do not regard supply-side policies as necessarily heretical, that are practised with success in Germany and the Nordic countries but are regarded as anathema to most French socialists.

The minister for municipalities, Francois Lamy said:

" It is not a switch to a social-liberal policy. The president is both a socialist and a pragmatist who adapts his policies to the situation. "
" It is not a change of course, it is not a new policy, but a deepening and an acceleration " of policies already being pursued by the government, declared Budget Minister Bernard Cazeneuve on January 5.

There would be " a consolidation " of a corporate tax credit that is already in place and over the three years 2014 to 2016 will increase from about €5bn to €20bn (about 1 % of GDP). He did not say whether this meant that the tax credit would be extended beyond 2016.

The other reform he mentioned was the suppression, or perhaps the consolidation, of " about 150 taxes that apply to businesses but raise only small sums of money ". This would not raise a serious budget problem for the government but would amount to " an extraordinary simplification " for companies.

He did, however, also confirm that the government hoped to be able to reduce taxes and social insurance charges (compulsory levies) from 46.3 % of GDP currently to 45.8 % by 2017, when the next presidential and parliamentary elections are due.

MEDEF, the leading employer organisation, dominated by large companies, has been cautiously positive about the president's initiative. It has already said that the members of the organisation would be prepared to create a million jobs over the next five years if the government would lower labour costs.

MEDEF signed up to a government invitation to labour market partners to discuss what measures should be taken, but the biggest organisation for small company employers declined to sign, saying it wanted to know more about what it was signing up to first.

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