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23 October 2013

The Rise and Fall of France

By Milton Ezrati

FRANCE’s ECONOMY is not just doing badly. It is in profound decline. The slide has proceeded far enough now that businesspeople and politicians across the Continent increasingly refer to France as the “sick man of Europe”—quite a distinction at a moment when Greece, Portugal, Spain and Italy share the hospital ward. For decades, European Union structures were strong enough to allow Paris to ignore the country’s economic shortcomings. No longer. Unless Paris reforms its economic policies and practices, it could have a disastrous effect. Further economic woes may undermine the Franco-German cooperation on which the EU has relied, confronting the union with either dissolution or, more likely, an increasingly Germanic future.
Though recent economic reports show some slight improvement in the French economy, the underlying picture is nothing if not bleak. A monthly uptick in industrial production this spring prompted President François Hollande to declare the recession over. He was wrong. To be sure, he can now point, if he wishes, to a modest spring expansion in France’s gross domestic product (GDP). He would do well, however, to resist declaring victory over a few data points. His optimistic response to seeming industrial strength was quickly rebutted by subsequent indicators of renewed decline. He should have known that the preponderance of economic evidence remains grim and is unlikely to change anytime soon.

More than one thousand factories have closed in France since 2009. And not a week goes by without another announcement of relocations to Eastern Europe or Asia. Rates of new business formation today remain 13.3 percent lower than at the end of 2009, while business failures are 7 percent higher. The pace of home sales, though it seems to have stopped declining, shows no sign of improvement and remains 16 percent below 2008 levels. Residential real-estate prices continue to decline. Unemployment rolls have grown without interruption, recently averaging some 10.5 percent of the nation’s workforce. Youth unemployment averages over 26 percent. Real wages in France, having stagnated for some time, have declined for the last four consecutive quarters. The country’s balance of international payments continues to sink deeper into the red, with the shortfall of exports to imports almost doubling in just the past year to almost 3 percent of GDP. Government finances, too, continue in deficit, far exceeding the EU’s mandated maximum of 3 percent of the economy. Budget shortfalls over the years have brought public debt outstanding to fully 90 percent of France’s GDP.

French authorities mostly have either denied the situation’s severity or blamed it on Germany’s push for budget austerity throughout the euro zone. There is no shortage of critical remarks to make about the German approach, but it can hardly explain France’s economic problems. France, after all, hardly has imposed much austerity. It has promised to do so but otherwise has asked of itself none of the sharp government spending cuts evident elsewhere in Europe’s periphery. On the contrary, French government spending has continued to grow, rising almost 4 percent during the last two years. Government in France now constitutes some 57 percent of the entire economy, well above the euro zone’s average. Meanwhile, Paris recently sidestepped the need for more strictures, receiving permission from the EU bureaucracy to continue wider budget deficits than EU rules allow until 2015 at the earliest. Nor can French officials honestly blame German austerity when their nation’s economic slide has beginnings long before the current crisis or Berlin’s response to it. France, quite simply, has been underperforming the rest of Europe for over a decade.

It is this longer-term erosion that speaks to France’s economic failure. Germany offers a useful counterpoint. Whereas ten years ago the French economy rivaled Germany’s, today France produces only half the value added. French exports, having fallen more than 20 percent since 2005, are lower today than anytime during the last twenty years. In contrast, Germany has enjoyed an export surge in the past few years, pushing the country up from recession lows to its all-time high. France has even begun to trail Europe’s troubled periphery. While it has 10 percent fewer exporting firms than it had thirteen years ago, troubled Italy has 8.7 percent more. France’s share of global exports has fallen from 7 percent in 1999 to only 3 percent today. During this time, its share of the euro zone’s exports has fallen from 17 percent to merely 12 percent. Real per capita incomes in France have grown at barely half Germany’s rate, while profits in French industry have fallen from highs approaching 9 percent of GDP to barely over 6 percent today, only half the euro zone’s average and hardly sufficient for French industry to finance itself.

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