Outline of the French economy

Page index	Overview	Reform
Perceived strengths	Perceived weaknesses	Recent developments

 Overview of the French economy

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 very 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 kept reaffirming that things were getting better, few people in France believed him; even positive figures have been greeted with a certain scepticism.
     As the situation failed to improve, there was 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 difficult situation, compared to other developed 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 most interestingly, when 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.....
   In industrial sectors where France has world-class skills and a workforce  keen on ensuring that the contracts keep coming in, sectors such as aerospace and shipbuilding, the perceived failings of the French economy do not seem to limit performance. In  2016, the world's largest cruise liner was launched from the dockyards of Saint Nazaire,  and an order came in for two more megaliners; and Airbus, the European plane manufacturer, has its headquarters and main facility in Toulouse, assembling the world's biggest jetliner the A380 and other successful models. In terms of luxury goods and wines, France is a world leader.

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.
    Until the late 2010s, that political will was 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. By 2019, it had fallen.... to 55.3%.

    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, a thorough overhall of France's byzantine and multi-layered local government system, and  reductions in France's generous social security allowances.
   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 pledged to go easy on taxes, to avoid placing any further uncompetitive burden on French industry; but his reforms were hampered by the far-left factions in his own party who did not share the same economic views.
    Reforming France is very difficult - to the point at which some are saying that nothing less than a new French revolution is needed. Maybe the election of President Macron in 2017 marked the start of that revolution. Macron got off to a good start by introducing pension reform and social security reforms, but then Covid came along and all reforms were put on ice. In late 2021, a long-awaited reform to unemployment benefits finally came into law, reducing many benefits and making others degressive, and Macron has promised to complete the reform of France's retirement pension schemes. This is liable to have to wait until Macron's hypothetical second term, in 2022.
     

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 highest level of employer payroll tax (cotisations sociales) in OECD countries. In 2020, employers were paying an average payroll tax of 26.6% on top of an employee's salary. Though this has been reduced since 2015, it remains several points higher than most other EU countries. By comparison businesses in the UK pay a payroll tax (NI contributions) of just 9.8%, and those in the USA just 7.6%, which are well below the OECD average.  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.
   Yet the question of payroll tax levels is not as simple as some people would like to imagine. Until recently payroll taxes almost four times higher in France than in the UK have not crippled French industry in the way that advocates of low payroll taxes would like to imagine; but the high cost of labour in France has take its toll. In 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  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. President Macron has pledged to make France competitive again.
    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 (and in some cases the abolition)  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 growing 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 lost 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. OECD figures (2012) also show that labor productivity in France, in terms of  GDP per hour worked, is among the highest in Europe (only exceeded by Benelux countries and Ireland), 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 alarming 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, 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 socialist government set to work, the economy was sluggish, and deficits remained high. President François Hollande pledged to balance the budget by 2017, but  France's national debt  continued to rise , and there was considerable scepticism among analysts as to whether Hollande would 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, were seen in many quarters as more liable to damage France's economy than stimulate it.
   Five years later, Hollande had failed to take any radical measures to restore French competitiveness.  The timid reduction in public spending that was announced, though causing turmoil on Hollande's "tax and spend" left wing, could not produce the stimulus that the French economy required.      
   To try and get the economy moving again, Hollande chose a former Rothschild's banker, Emmanuel Macron, as minister for the economy, with the remit to get France's economy back on the rails. Macron's proposals caused howls of protest from left wingers, and had to be pushed into law in spite of parliament; but they became law, even if they were slightly watered down. Then in 2016, new labour laws were passed, again without the consent of parliament – as is possible under the French constitution.
   It was a start, and economic figures for the final months of the Hollande administration were somewhat better than in previous years... moving slightly in the right direction, though still not good. On the key measurement of unemployment, it was not until May 2017 that it finally dropped back below 10%.... the level it was at when Hollande assumed office in 2012.  French industry continues to suffer.
   Yet if the green shoots of recovery remain desperately few and far between, there are more encouraging signs than there were.  Macron, now President, has pledged to get the economy working again, and a fundamental reform of the French economy has begun. In 2019, Covid threw a spanner in the works
   Past presidents, since Mitterrand, have come to grief on the rocks of public opinion, shelving necessary but unpopular economic measures in the face of opposition from unions, students, political opponents, the media and virtually everyone with an axe to grind.
   If Macron wins a second term in 2022, expect more economic reforms over the ensuing five years.

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