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Outline of the French Economy

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Is the French economy really so different from that of other industrialised nations? As this brief guide shows, the answer is generally no; as regards fundamentals, the French economy is run on the same lines as that of other developed nations. But in the details, there are some differences that can cause raised eyebrows when seen from abroad....... 


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The French economy: strengths and weaknesses


Index Overview
Reform
Perceived strengths
Perceived weaknesses
Recent developments

 Overview of the French economy

Economic news

Analysis - 2014 : See Can France change ?

December 2014
New minister for the economy Emmanuel Macron announces the first steps in a series of projects to free up the French economy. Are the winds of economic change really starting to blow in France? See News.

March 2014
Unemployment reaches new record high: almost 3.35 million out of work in France.
President Hollande's main election pledge was to cut unemployment massively and durably; but it has increased by about 140,000 since he took office.
The public deficit in 2014 was 4.3% of GDP, meaning that the government missed its target of 4.1%, and seems unlikely to reach the EU-imposed target of 3% in 2015.
Public spending in France, among the highest levels in the world, reached 57.1% in 2013.
(Figures from INSEE - the French government statistical office)

November 2013.
 Le "ras l'bol fiscal"  – taxation in France has got out of hand.
Analysis : See French tax crisis 2013
   There is a popular view, often seen or heard in the media, that the French economy is somehow vastly different in its operation from other modern economies. France is even sometimes depicted as a something close to a rogue economy, where workers are constantly on strike, businesses are held hostage to all powerful unions, and free enterprise is virtually impossible.
     Like most myths, the rogue economy myth - largely perpetrated by people with an axe to grind, or by outside commentators who have never set foot in the country - has only a little grounding in reality; but like all myths it is a caricature where weaknesses are blown out of all proportion, and strengths swept under the carpet.  For all its weaknesses - and its strengths - the French economy is alive and well, and performing above average in G20 terms.
      Standard & Poor's downgraded France's rating from AAA to AA+ in January 2012,  Moody's followed in November 2012, and Fitch, the third of the main ratings' agencies, finally downgraded France's rating in July 2013.

      Since 2013 there has been an increasing consensus, even in France, that the French economy is in the doldrums. While president Hollande keeps reaffirming that things are going to get better, few people in France believe him; even positive figures are greeted with a certain scepticism.
     As the situation fails to improve, there has been much soul-searching in France, concerning the country's economic problems. In April 2013, the French newsmagazine le Point ran an issue headlined Are the French lazy? To which the answer provided was a resounding "yes" - backed up with international comparisons showing that a) the French work shorter hours than other major European economies (1,679 hours a year, compared to 1904 hours in Germany), b) they retire earlier than people in other European economies (average retirement age 60.3 years in France, compared to 62.6 in Germany, and 64.1 in the UK), and c) they take more holidays than people in most other major European holidays... 36 days per year,  the same as the British, but 7 days more than the Germans.  Le Point concludes with the observation that  the number of  hours' work per year per inhabitant in France (total number of hours worked divided by total population) is among the lowest of any developed economy  -  11% lower than in Germany, 22% less than in Scandinavia, and almost 40% less than South Korea.
     It is not rocket-science to work out that this comparison is very alarming for the French economy. A simple application of essential economics, as first outlined by Adam Smith in the Wealth of Nations, over 230 years ago, suggests that the French economy is in a very parlous situation, compared to other developed nations.
Comparing national economies
     According to the OECD, France in 2008 was the world's fifth economic power, behind the USA, China, Japan and Germany, and just ahead of the UK. But ranking national economies in a table is not always as clear-cut as it might seem.  In monetary terms, the relative value of national economies varies with exchange rate fluctuations which are partly due to currency speculation, not to economic performance. 
      In order to evacuate the exchange rate variable from international economic comparisons, an alternative and more objective way of comparing economies is to do so at "purchasing power parity" - a system that takes into account the cost of living in each country.  In terms of GDP (Gross Domestic Product) at PPP rates , France in 2008 was in 9th position, below the UK, Germany, India and Russia. In terms of GDP per inhabitant at PPP rates, France is going down. In the world ranking table (which includes micro nations such as San Marino, the Cayman Islands or Liechtenstein), France fell from 39th place in 2008 to 41st place in 2009. When such microeconomies are excluded, France ranked 19th among major industrial nations.

Yet all is not doom and gloom. While the French may work less than people in other countries, there are plenty of people in France who put in very long hours - notably the self-employed. And compared on a hourly basis, rather than an annual basis, French productivity is high ; in hourly terms, the French are more productive than the British and than many other Europeans - the trouble is that they don't work enough hours.....

The need for reform

    Like all developed economies, France has suffered since 2007 from the effects of the global recession; but the effects in France have been partly cushioned by a more cautious banking and investment sector, and by a tradition of state intervention in the economy. In addition, France is world-leader when it comes to the proportion of the labour force working in public sector jobs: 25% in 2005 - few of whom were affected by the economic downturn.
    While the French economy has not run out of control like the economies of Greece, Italy, Spain or Portugal, there are many in France who fear that if another European economy were to falter, it will be France. That has not happened, and given the undoubted strengths that the French economy has, probably will not happen. But it will depend on how much political will there is to get the French economy back on the right track, and make it competitive again on a global scale.
    Up to now that political will has been singularly unforthcoming in France. Perhaps, in the past thirty years, the great misfortune of the French economy has been the singular failure of France's political leaders, of both left and right, to take heed of the warning signs, such as France's endemically high level of unemployment. The last time a French government balanced the books was in 1980, under Prime Minister Raymond Barre, a professor of economics. Since then, even as the deficits have been mounting, governments have continued to tax more and spend even more, to the point where public spending in France reached the level of 55.9% of GDP in 2010 - compared to 49% for the UK and 45.6% in Germany (OCDE figures), a level considerably higher than that of any other major economy.
    Even under President Sarkozy, a conservative president who vowed to reform French instutions and get the economy going again, very little was done. Like all recent French presidents, Sarkozy, afraid of confronting too many vested interest groups,  failed to take the strong measures needed to reduce deficits and rein in public spending. While he did have the strength to push through unpopular pension reforms, and try to reduce the cost of government, he did not take any of the drastic measures that the French economy needs, if it is to start moving in the right direction again.  These include major and unpopular reforms of French labour laws (which will be fought tooth and nail by the trade unions), a thorough overhall of France's byzantine and multi-layered local government system (which will be fought tooth and nail by all those with a vested interest in keeping their bit of local power), and severe reductions in France's generous social security allowances (which will be fought by the unions, and by all those who benefit from the system's current largesse).  
    Reforming France is very difficult - to the point at which some are saying that nothing less than a new French revolution is needed.
     In July 2013, the IMF gave a cautious welcome to efforts being made by the Hollande government to bring down the deficits and regenerate the French economy; but this was qualified by a warning that more should be done to cut public spending, rather than raise taxes. Hollande has pledged to go easy on taxes, to avoid placing any further uncompetitive burden on French industry; but there are those in the his administration who do not see priorities in the same light.

Perceived strengths of the French economy

In many sectors, the French economy is among the strongest in the world. France is among the leading industrial economies in the automotive, aerospace, and railways sectors, as well as in cosmetics, luxury goods, insurance, pharmaceuticals, telecoms, power generation, defence, agriculture and hospitality. France is also the world's leading tourist destination – at least in terms of numbers, though not in terms of tourist spending.
    French companies operate worldwide; they run some of the big red buses in London, as well as trains and bus services all over Europe, they run supermarkets on four continents, including over 200 hypermarkets in China, they produce some of the pharmaceuticals, beauty products, and dairy products people use in their daily lives worldwide; and much more besides.
   Regarding its labor market, France has one of the highest levels of graduates, and the highest number of science graduates per 1000 workers of any European country.
   In the years following the second world war, the French economy developed massively from a largely agrarian economy with over 40% of the population still living on the land, into a modern industrial economy with world-class coprorations and business leaders.  In the years 1945 - 1975, known as "les trente glorieuses", the French economy grew by an average of 4.1% in terms of GDP per inhabitant, far faster than the USA or the UK though slower than Germany or Japan. The French state - which for most of this time was in the hands of Conservatives - played an active role through the establishment of a series of four year plans (Contrats de plan), whereby the state set economic targets and economic priorities, but left it up to private enterprise to achieve or apply them. For example, the rapid development of the French motorway system was achieved (and is still being achieved) by public investment offset by the sale of long-term concessions to private or semi-private companies to operate and maintain them.
    Between 1945 and 1986, political leaders from de Gaulle (a conservative) to Mitterrand (a socialist) embarked on policies of nationalisation and state intervention.
     For de Gaulle, nationalisation was seen as a tool of economic development, guaranteeing a stable environment for key sectors of the French economy, but also ensuring support from his opponents on the left.  Car-maker Renault was nationalised by de Gaulle in 1945 as much to help it recover from the war, as to placate the Communist opposition and the unions.
     For Mitterrand, nationalisation was ideological. During his first presidency, from 1981, Mitterrand initiated a series of nationalisations in a range of different sectors, including banking, insurance and pharmaceuticals. However, for his second presidency, he advocated the famous "ni-ni" doctrine (the neither nor doctrine), proposing neither nationalisation nor privatisation. In actual fact, this was a way of admitting the failure of his previous policy; during Mitterand's second presidency, France embarked on a wholescale policy of privatisation, which continued during the Chirac presidency, reaching its peak under the government of socialist prime minister Lionel Jospin.
     Yet beyond the issue of nationalisation or privatisation, the French state has maintained an above-average ability to intervene in economic affairs, remaining a major shareholder in utilities such as EDF where it has a majority holding, or France Telecom (Orange), in which it has a 27% holding.
     As a result of its hands-on approach to economic management, France has been able to ensure some remarkable economic success stories. Among the most visible of these is France's world-leading success in the field of rail infrastructure. France was the first country in the world to propose, plan and set up a dedicated high-speed rail network; today the country can boast the world's second most extensive high-speed rail network (after Spain), one which runs without interruption from the North Sea to the Mediterranean, and east-west from near the German border to the lower reaches of the Loire. State intervention in the automotive sector has helped Renault become one of the main world players; the French government still holds a 15% stake in Renault which, in turn, is the leading investor (almost 45%)  in Nissan.
    When it comes down to hard facts, critics of state intervention in the French economy have to tread carefully.

Perceived weaknesses of the French economy

     Paradoxically, the extent of the French state's involvement in the economy has proved to be one of its main weaknesses, as well as one of its main strengths. In recent decades, the development of state favors and aid in certain economic sectors, along with the cost of major infrastructure programs and social services, have led to a huge increase in the budget of the French state. To finance its programs, the French government, like all others, has had to resort to increased taxation; but in France, a larger than usual proportion of this taxation has fallen on business, rather than on private individuals.
   French business is currently burdened by the world's highest level of payroll tax (cotisations sociales), which at 43% are far higher than in any other country. The next highest rates are found in Spain and the Czech Republic (30%), while businesses in the UK pay a payroll tax (NI contributions) of just 11%, and those in the USA just 5%.  In an increasingly global economy, this disparity is damaging for French industry, and is one of the perceived causes of endemic high unemployment in France. It has also led the French economy to suffer from offshoring, the export of jobs and manufacturing capacity to low-wage countries. Until recently the fact that the burden on employers of payroll taxes is almost four times higher than that of  NI contributions in the UK has not crippled French industry in the way that advocates of low payroll taxes would like to imagine; however signs are that this is changing. In mid 2012, French automobile giant Peugeot announced a massive workforce reduction programme, including the suppression of 8,000 jobs in France: with hourly total labour costs in France now running at €34.2 per hour, among the highest in Europe (source Eurostat)  and higher than any other major industrialized economy, the outlook is not good, especially with the new Socialist government set to increase overall labour costs rather than reduce them.
    High tax burdens are particularly felt by small businesses. However numerous counter-measures have been introduced by successive governments to offset their effect; these include lower levels of payroll tax on workers paid at minimum wage, tax breaks for the hiring of young employees or apprentices, aids for employers in certain high-unemployment areas, and more. In all there are dozens of forms of aid available to companies – and that is a problem in itself, as finding one's way around the maze can be a daunting task. The system needs to employ hundreds of civil servants just for administration. "Simplification" is one of the most frequently heard demands made by small businesses in France.
    The high level of corporate taxation in France is logically another of the principal causes of the falling competitiveness of French industry on the global market, and its fgrowing trade deficit. These in turn contribute to France's systemic problem of high unemployment.
     Employee rights - though a great advantage from the employee's point of view - are seen as another weakness of the French system, specially by employers. Many aspects of France's social systems are piloted by complex management arrangements involving the state, management and the unions - referred to collectively as "les partenaires sociaux". Though less than 10% of workers in France belong to trade unions (far less than in the UK or the USA), unions wield considerable power through their role as partenaires sociaux. Thus, over the years, successive French governments of both the left and the right have given in to union demands in order to buy stability and popularity. The result is a system whereby employees in France enjoy a high level of job protection and guaranteed salary levels. In large corporations this is not too much of a problem; but in small businesses employers frequently hesitate to create jobs for fear of being unable to lay the new employees off without considerable penalties. Alternatively they outsource work to foreign suppliers rather than employ staff locally, or resort to temporary contracts rather than offering full-time permanent jobs. This situation also depresses salaries. All this is bad for employment, since in all developed economies, it is small businesses that create most of the new jobs.

Myths about the French economy

     Finally we come to those two big myths about the French economy; a) that the French are always on strike, and b) that the French work far less than other nations.
     If a nation's workers were constantly on strike, that would be a serious economic handicap; fortunately this is not the case in France, and commentators who suggest otherwise are just making things up. According to the IMD survey of 2008, France continues to lose less days to strikes per 1000 inhabitants (3.67 days)  than either the UK (10.06) or the USA (5.67). The problem in France is that strikes are highly visible, because they tend to be concentrated in large public services and give rise to major protests and demonstrations in Paris.... within a few hundred yards of bureaux of  many of the world's main TV stations, press agencies, newspaper correspondents and other purveyors of news. When French public servants strike, the world knows all about it. Conversely the world never hears much about the vast majority of employees in France who never go on strike.
    As for the perception that French workers work far less than their counterparts in other countries, that is not always the case. It is certainly true in some sectors, notably in the public sector and in large industries ; but it is not at all true in others. According to the International Labor Organization, management level employees in France work among the longest hours in Europe (almost 10% longer than in the UK), while the workforce works slightly below the European average, putting in comparable hours to workers in Sweden, but more than workers in the Netherlands, Norway or Denmark. ILO figures (2008) also show that labor productivity in France, in terms of  GDP per hour worked, is the second highest in Europe after Norway, and only fractionally lower than in the USA. Thanks to this, France has up to now managed to remain a major exporting nation and one of the top six economies in the world – though maintaining this position will not be easy, and France's manufactured exports are currently declining at an alraming rate.
    In the end, perhaps the main perceived weakness of the French economy is that it is not run on quite the same model as what the French refer to as the "Anglo-Saxon" economies. This does not make it intrinsically less successful, just different, though not so very different. France is home to many world-scale corporations; it has its millionnaires and its entrepreneurs, several of the best business schools in Europe, its rich and its poor. However the gap between the rich and poor is not as flagrant as it is in many other countries, and the French want to keep it this way. The French - as a nation - believe in strong state and state intervention. Though they complain about high taxation, and though complaints are in 2013 becoming increasingly common, they do so less than people in other countries, and generally accept that it is a necessity required to pay for their excellent welfare state. For instance, they would rise up in rebellion (like citizens in the UK or virtually any other western nation)  if any governement suggested curtailing the public health care system in order to reduce taxes.

Recent developments in the French economy.

    Since 2007, France like other countries has had to adapt to new global economic realities. It is doing so through measures designed to modernise its economy; but modernisation in France is often a difficult process. The Sarkozy government became deeply unpopular in part (though not exclusively) through its programs of "reform", which did not go down well with many French voters, particularly those who saw themselves losing out. France suffered less than the UK and many other major economies from the economic downturn in 2007; but three years later it was also slower in bouncing back. The Sarkozy government, though undertaking certain reforms, such as raising the retirement age, failed to get seriously to grips with the most pressing problems of the French economy: firstly an excessively high level of taxation, and secondly - largely a result of the first problem - the falling competitiveness of French business in the international market.
   In mid 2012, as the new socialist government set to work, the economy was sluggish, and deficits remained high. President François Hollande pledged to balance the budget by 2017, but for the time being France's national debt will continue to rise before it stats to fall back, and there is considerable scepticism among analysts as to whether Hollande will be able to meet the challenge. Initial measures announced by the new government, such as the partial rolling back of the retirement age to 60 for those having worked 41 years, and the creation of new jobs in the public education sector, have been seen in many quarters as more liable to damage France's economy than stimulate it.
   A year into the Job, Hollande has failed to take any radical measures to reduce unemployment and restore French competitiveness. A deficit-reduction programme has been announced, but with half of the reduction coming from increased taxes, most of them on business, many economists remain underwhelmed. The timid reduction in public spending that has been announced, though causing turmoil on Hollande's "tax and spend" left wing, seems unlikely to produce the stimulus that the French economy requires, and meanwhile unemployment continues to rise, French industry continues to suffer, and the green shoots of recovery remain desperately few and far between. The unexpected rise of 0.5% in French GDP in the second quarter of 2013 was due to consumer spending and government spending, not to increased production, and many analysts fear that it will not be sustained.

More information : see News from France
  
 

Glossary:
Budget deficit or public deficit : The amount by which a government's annual spending exceeds its annual income.
GDP (Gross Domestic Product) : the total value of economic activity (i.e. wealth generated by work or investment) within a country in a year. GDP is measured either as an aggregate (total GDP, i.e. the size of an economy), or per person (GDP per capita).
National debt: An indicator at a given point in time: it is the value of money owed by a government to all its creditors, both nationally or internationally. Servicing the debt, i.e. paying interest on the money it owes, is a major spending item in the budgets of many nations.
 
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