10 problems with the French embassy's economic analysis
After a recent editorial from City A.M. editor Allister Heath (France’s failed socialist experiment is turning into a tragedy) the French embassy wrote a piece in response.
Here are 10 points on which we disagree over the French economy.
1. Growth prospects
The European Commission’s growth forecast for France stands at 0.2% for 2013 and 0.9% for 2014. Real GDP growth is expected to reach 1.7% in 2015.
It’s great news that France is expected to have made a small step towards recovery in 2013, but the French should not be satisfied with 0.2 per cent growth last year and 0.9 per cent in this.
The real error, however, is in having such a short term view of the country’s prospects. Cebr’s 2013 World Economic League Table forecasts that France will drop from the world’s 5th biggest economy in 2013, to its 8th in 2018.
The downwards slide won’t stop there, say Cebr, but will see France at 10th in 2023, and 13th in 2028.
Part of this story is an international development one, as countries with larger populations experience a productivity catch-up, but France’s European neighbours - the UK and Germany for example - aren’t expected to see such a drop.
Germany and the UK are both predicted to remain among the world’s top ten economies by 2028. Germany is predicted to slip from 4th place in 2013 to 6th in 2028, while the UK will take 7th position.
2. Growth indicators
PMI surveys have been very unreliable in predicting France’s GDP growth over the last few quarters. Business surveys conducted by Insee, the national statistical agency, and Banque de France have had a better track record
It may (or may not) be true that purchasing managers’ index (PMI) data has been poor at estimating GDP growth, but GDP growth shouldn’t be the only measure by which we judge a country’s economic health.
Crucially, PMI figures gives us a read on the conditions of a nation’s private sector - which is arguably the most important contributor to growth. It’s that part of the sector that we can rely on to provide most of the goods and services on which we rely and enjoy.
Private sector resource use is kept in good check by the ability of customers to exit business arrangements. If you don’t like a product, or it fails to meet your standards, you can walk away from it. The same checks don’t exist when dealing with the state.
3. Tax burden
The French and UK tax systems are based on different traditions. For one thing, the French tax system is fundamentally more redistributive
The embassy has chosen to compare UK and French income tax, without comparing the tax burden of the two countries as a whole. How lovely it would be if income tax were the only way in which the state collects revenues.
But France is now more burdened than the UK. PwC’s Tax Freedom Day 2013 report found that the country’s total tax burden has risen to 46.3 per cent - 1.3 percentage points higher than the UK’s.
OECD figures show that French government spending stands at 57 per cent of GDP, while tax revenues standing at a staggering 52.8 per cent of GDP.
Taxing more now to increase incomes today may be politically appealing, but such high taxation diverts resources from necessary business investment and inhibits growth. That will keep incomes lower going forward.
A tax rate of 40% applies in the UK as soon as income reaches £32,011
This is a silly error, but it’s worth mentioning. We don’t start paying tax at the 40 per cent rate until we earn more than £41,450 in the UK - that’s the £9,440 personal allowance plus the £32,011 higher rate threshold.
4. Regulatory burden
In his New Year’s address, the French President reaffirmed his commitment to simplifying administrative procedures
Hollande says he's keen on "simplifying administrative procedures", but we can't see the evidence. If anything, 2013 really was a year in which the French government jumped the shark when it came to introducing bizarre and nonsensical laws.
We've seen new rules such that see passengers forced to wait 15 minutes before their online-booked car can pick them up. Online booksellers have also been hit with a ban on providing free delivery to readers.
The World Economic Forum’s Global Competitiveness Report 2013-2014 confirms these observations. It ranks France as the 130th worst country in the world (out of just 148) for its burden of regulation.
5. Wasteful public spending
France’s public spending is again based on a different tradition of public services … success exists in infrastructure, from high-speed rail to energy … France has always sought to achieve greater efficiency
While French infrastructure may be sound, it’s not at all clear that it’s made it any easier for people to work. Empty motorways aren’t impressive enough to compensate for a lack of jobs, and it’s far from clear that heavy infrastructure spending is making France competitive.
The IMD’s 2013 World Competitiveness Rankings feature France as one of its “losers” - one of the biggest fallers since 1997. Now at just 28th place, in 2000 the country was close to the top 20, before falling out of even the top 30 in 2006.
The WEF report provides yet more insight. Of the 148 countries included France places just 71st for overall labour market efficiency, and only 116th for labour market flexibility.
France is in dire need of an overhaul of its rigid jobs markets, and the WEF recommends “injecting more flexibility”, an important step that both Germany and the UK have already undertaken.
To top it off, the WEF’s findings disagree about the wastefulness of France’s high government spend. France comes just 83rd for efficiency of government spending.
The last time France ran a budget surplus was in 1974.
6. Public attitudes to commerce
[A] positive balance of trade is a sure sign that commerce and trade between our two countries, to name just one example, remains dynamic and unaffected by “generalised hatred”.
If a trade surplus is a sign that a country loves trade, is a deficit a suggestion that those who buy goods from abroad don’t like it? That would be a strange conclusion to arrive at.
If evidence is needed that a hatred of business is tolerated in France, look no further than last week’s boss napping. Two Goodyear executives were taken hostage during redundancy negotiations for over 24 hours.
This is not normal behaviour in a co-operative society, let alone in a well functioning market economy. If it were to happen elsewhere we would see outrage, while in France this is not an isolated incident. In 2009 there were a number of similar incidents in the country.
7. France shuns capitalism
It is difficult to argue that France shuns capitalism when it is the top European country in the Fortune Global 500, with 35 French companies featuring on the list.
Adam Smith famously said that there’s a “great deal of ruin in a nation”. He must have been thinking of France.
Take a glance at the Fortune 500 companies referred to by the embassy. Most are now veteran companies, and those that might chose to leave are no longer mobile enough to vacate the country.
Trace the roots of the firms in the list. None in the top 30 have beginnings in the last 50 years.
Many are great assets to France and to the thousands they employ and provide for, but France also needs to be encouraging dynamic and nimble startups.
Unlike the relatively entrepreneur friendly US, there are no Apples or Googles to be seen.
8. Productivity problems
A very simple data search reveals that France’s labour productivity stands at a healthy €45.4 per hour worked according to Eurostat. This is well ahead of the EU-27 average of €32.1
France may boast some impressive productivity data, but this is largely because it’s difficulty for any but the most productive to find work.
That’s the result of the aforementioned regulatory system, and high level of government spending, among other things.
As a result, the country’s workforce may appear productive - but remains far too small.
OECD labour market figures released today show that the French unemployment rate is stuck in double digit territory, at 10.8 per cent in November 2013 (or 3.193m people unemployed).
While in the UK official numbers show that unemployment has fallen to 7.4 per cent by September 2013 (or 2.377m people), and Henderson economist Simon Ward has estimated that single-month unemployment fell to 6.98 per cent in October.
9. Investing in France
France is ranked sixth in the world for receiving Foreign Direct Investment, with $59 billion-worth of inflows in 2012 alone.
That France is currently highly positioned as a recipient investment of today does not mean that it will be one in years to come.
Foreign direct investment (FDI) has already begun declining according to OECD data. From $64.1bn in 2008 to $38.6bn in 2011. In part, the downturn is cyclical, but the years ahead are likely to be tough for France.
10. How to solve France’s economic woes
Instead of taking spectacular and brutal measures, the French government has opted for serious, sustainable and socially fair policies in a very clear road map
Business commentators have only just started to digest what may be some positive comments from French President Francois Hollande. Even if they turn out to be decent - and it’s too early to tell - we can be certain that their overall impact will be limited.
Real change is needed, not mere tinkering; and Hollande clearly sees job-creation as some sort of corporatist quid pro quo with a monolithic business sector: some tax cuts in return for a given number of jobs. Yet that’s not the way economies work.
Many citizens agree that France is not the place to be. In fact, in May last year it was reported that by number of French citizens, London is now France’s sixth biggest city. Britain’s capital was then estimated to be home to 300,000 to 400,000.
Increasingly a hostile environment to both business and success is scaring away talent and ambition. France is seeing the departure of its most wealthy, along with its most famous actor, Gerard Depardieu.
In 2012 Sotheby's Realty said that its French offices had sold more than 100 properties over €1.7m (£1.4m) between April and June. Much higher than the volumes witness during the same period in 2011.
Ignoring the country’s increase indebtedness, heavy handed tax regime, and rigid labour market is no longer an option. Only a free-market revolution can possibly save France.
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