France will stay the lame duck of Europe if voices for reform remain mute

Howard Davies

VISITORS to France are often impressed by its network of fast trains, and its miles of half-empty motorways. They are right to be. The French had their HS2 debate decades ago, and the railway buffs won. As a result, the World Economic Forum ranks France fourth for infrastructure in its global competitiveness survey. (Airports are an exception: the World Airport Awards put Charles de Gaulle in 82nd place and falling, with Heathrow at tenth and rising. That’s not the story critics of London airports like to tell).

Airports aside, the French government has built a spanking platform for its companies. The problem is that, in other ways, it has made it tough for them to perform. In the same survey, France ranks 116th for its labour markets – strict rules make hiring and firing complex – and 127th for its tax system. Overall France ranks 23rd, against Germany’s fourth position. The UK comes in tenth.

France has been described, often by German politicians, as the new sick man of Europe, a title first held by the Ottoman Empire in the nineteenth century. And there is tough competition for that crown, from Greece and elsewhere. But how serious is the French condition? We British are often inclined to write-off our cross-channel neighbours, and they repay the compliment in spades.

Two things worry the French most: their declining competitiveness vis-à-vis Germany, and their bloated public sector. The two phenomena are closely linked. French unit labour costs have risen since the introduction of the euro, while Germany’s fell sharply, at least until 2008. One consequence for France had been a large trade deficit.

At the same time, public debt has risen, not as rapidly as in the UK, but from a higher base. France expects a ratio of public debt to GDP of around 95 per cent next year, in spite of half –hearted government attempts to cap spending. Public expenditure will be 57 per cent of GDP, the highest in Europe. Of that, social spending (pensions, benefits) will be over 32 per cent, against about 24 per cent in the UK.

And worse is to come. The dependency ratio – the number of employed people for every pensioner – is expected by 2030 to be 2.4 in France, against 2.9 in the UK and 3 in the US. Those French in work will have an even heavier burden on their backs in future.

These are all danger signs on the liability side of the balance sheet. But France has some highly valuable assets too. Some of its major companies are world-beaters: St Gobain, EDF, Veolia. The productivity levels of those who do work are materially higher than ours. The average French worker produces 24 per cent more per hour than her British counterpart.

If the French could bring themselves to reform their labour markets, as the Germans have done, there are grounds to believe they could achieve a German-style turnaround. But last week’s bizarre dispute over Sunday trading shows that the anti-reform voices are as powerful as ever, and President Hollande shows no appetite for a fight. It would be optimistic to forecast an early turnaround. France seems likely to limp along, the canard boiteux (lame duck) of Europe, if not yet its sickest man.

Sir Howard Davies is chairman of the Pheonix Group, and a professor at Sciences Po in Paris.