France Needs an Economic Revolution
Once in a while the French and British engage in a rhetorical brawl, hurling verbal rotten eggs and stale baguettes at each other across the channel. The one that’s been happening in recent days has been a doozy.
It began with an article in the London financial press bemoaning France’s “failed socialist experiment” -- which so piqued the French ambassador that he posted a 10-point rebuttal on his embassy website. British and French politicians and commentators piled on.
France, Ambassador Bernard Emie rightly protested, is not a desert of mediocrity, abandoned by creative people: It has world-class infrastructure and companies, and the food and wine aren’t bad, either.
Yet his response ignored the larger truth in the British column: The French economic model has reached a point of self-harm that is driving away wealth and talent.
This is why President Francois Hollande’s declaration last week that France must fix the structural failures in its economy that are impeding private sector growth -- or else decline to insignificance -- was important. Here was the man who sought to rule as a socialist, substituting higher taxes for reform, publicly acknowledging the harsh economic realities France now faces in a globalized market, and demanding the changes that are needed to boost the country’s anemic growth and 11 percent unemployment.
Hollande’s U-turn was not all it might have been, however. To start, it doesn’t bode well that he conditioned his offer on a deal with French companies to collectively hire a certain number of new employees. That would be appropriate for a Soviet Gosplan meeting, not a market economy.
While deflecting questions about his romantic infidelity to first lady Valerie Trierweiler, Hollande offered 50 billion euros ($68 billion) worth of public spending cuts -- yet this is old money already allocated. He also said he would forgo 30 billion in social contributions from companies, but this, in large part, merely replaces a tax break that’s expiring. In total, his business tax relief amounts to 10 billion euros to 15 billion euros, which is less than 1 percent of French corporate profits -- not enough to set companies hiring.
The French state remains simply too big -- at 57 percent of gross domestic product, it is suffocating the economy. It needs to shrink closer to the European Union average of 49 percent. Nonwage labor costs in France, at just more than 50 percent of salary for a single earner, remain the highest in the Organization for Economic Cooperation and Development. These, too, need to fall toward the European average, about 42 percent of salary. Also too high is the French corporate tax rate; at 33.3 percent, it’s more than 50 percent higher than the U.K.’s.
Such costs aren’t the only reason companies are reluctant to hire. There’s also the difficulty of firing anyone already on the payroll. This is why new hires are often given only temporary contracts, and why France ranks 71st in the world in labor market efficiency.
Hollande didn’t cause these problems, to be sure. He has inherited the ill effects of long-standing national denial about the need to renegotiate France’s generous social contract. He is the least popular president in French history because he has failed to respond credibly, preferring to edge cautiously in multiple directions at once. Recent anti-tax protests suggest that French public opinion is at last beginning to grasp what is needed, creating an opportunity for Hollande. To seize it, he will need to decisively challenge his own party and embark on real reform.
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