Macron faces the colossal task of reviving the French economy
This performance is all the more surprising since, from an Anglo-Saxon economic point of view, France is doing almost everything wrong.
It has a huge public sector, with a corresponding tax levy, amounting to 47% of GDP, which is high by international standards; the government regularly intervenes in the functioning of the economy; the country is a hidden protectionist against foreign suppliers; and the workforce is militant, with a high number of lost strike days.
So, given all this, how come France is doing so well? Over the years I’ve offered a number of possible answers, though I can’t find any of them extremely compelling.
One of the best, I think, is that France is a naturally rugged country, with a rich and varied environment and a wonderful agricultural base, beautiful old towns and beautiful countryside, which makes it, among others, extremely attractive for national and foreign tourism. .
With a country like this, a government really has to do something very wrong to send it down the tubes. In contrast, the Netherlands and Singapore, for example, are fragile. There, prosperity must be snatched from less forgiving circumstances, and policy mistakes appear brutally.
Another possible explanation that I think is valid is that French bureaucrats and French business leaders are extremely capable – and uniquely capable of achieving the best results for the country, even when government policies and behavior are contrary to national interests.
One possible explanation I’ve heard put forward by others is that France’s covert protectionism is behind its success. But I can’t believe that’s true. Around the world, protection protects inefficient people and harms consumers. I don’t see how France is an exception.
I’ve always thought that a big part of the answer is that it takes a long time for a country like France to be out of balance, but the toll has been postponed rather than averted. He is yet to come – but he is on the way.
There are clear signs of underlying problems. Perhaps the most serious is the huge number of French people working abroad, up to 250,000 in London alone. They fled high taxes, an anti-corporate culture and a rigid job market.
Given these characteristics, the strong French productivity has an unfavorable element. Although unemployment fell during Macron’s first term, to 7.4%, it remains very high. Here in the UK it is only 3.8pc.
Public finances are also giving clear warning signals. The public debt ratio now stands at 115% of GDP, against 70% in Germany.
Although the yield spread on French bonds over German bonds is extremely small compared to the pre-euro era, it is still there, revealing that the markets do not believe that French public debt is quite l equivalent of German public debt.
Meanwhile, the balance of payments current account deficit has widened, indicating underlying competitiveness issues.
More importantly, France’s net external position is strongly negative, at almost 40% of GDP, compared to a surplus of almost 70% for Germany.
Macron has clear ideas on how to revive the French economy. He wants to raise the retirement age, reduce the size of the state, lower tax rates and improve the business climate.
But during his first term, protests by Yellow Vests severely limited the number of sweeping reforms he could push through.
Since then, the French are no longer docile. If anything, the opposite. And the standard of living is going to be squeezed by the cost of living pressures that we all face and that Macron can’t do anything about.
And beyond all of this are serious non-economic issues that are causing widespread consternation and concern, including immigration, crime and an alleged threat to French identity.
Meanwhile, Macron is a staunch supporter of European integration at a time when the EU is changing rapidly and evidence suggests the French have little appetite for deeper European integration.
I suspect that France is facing several years of civil war.
Roger Bootle is president of Capital Economics. [email protected]