The French Economy Is Bad in a Crisis

President Macron's biggest challenge is to make the nation dynamic again.

New leader, old problem.

Photographer: Marc Piasecki

Two measures highlight the seriousness of the economic challenge facing France's new president, Emmanuel Macron, who was inaugurated Sunday. The first is the current growth trend. Before 2008, France and the euro zone had similar growth rates; now France lags the euro zone trend growth rate of 1.6 percent. From 2013 the French economy grew just 1 percent on average, compared to 2 percent before the 2008 crisis.

The other indicator is per capita income. France's per capita income finally returned to pre-crisis levels only in 2016. Compare that to Germany, which hit that level in 2010, Japan in 2013, the U.S. in 2014 and the United Kingdom in 2015. This persistent lack of growth has been a major source of support for populist candidates and especially Marine Le Pen's National Front.

What is clear is that France's economy has become much less able to recover from an economic downturn than it once was. After the last two recessions -- the first oil shock in 1974-1975 and the European Monetary System crisis in 1992-1993 -- France bounced back quickly, as the chart below shows.

How France Recovers

Cumulative change in GDP per capita after each recession

Source: INSEE, Natixis

Footnote: Index based at 100 the year before the recession

The current period is different for several reasons. Part of the problem is that austerity policies, put in place since 2011, triggered uncertainty and limited demand in the manufacturing sector. Companies invested less in the period since the crisis, hence weakening growth momentum.

France's sluggish recovery has had disastrous consequences for public finances, with French debt now close to 100 percent of GDP. It has also prolonged the country's unemployment problem, with youth unemployment now at around 25 percent. 

So what's happening here? In general, growth can be held back either by low levels of productivity or insufficient hours worked. But on productivity measures, France has always done well. According to OECD data, France's productivity level is while above the U.S. level. Productivity growth has declined since the 2008 crisis, but it has done so in most other advanced economies as well. Starting from 2007, the productivity profile for France looks similar to those seen in Germany, in the U.S. or in Japan. In other words, the growth difference doesn't arise from a gap in productivity.

A more likely culprit is the labor market. Everywhere, from Germany to Spain to Italy, the number of hours worked has surged recently as overall economic activity picked up. In the United Kingdom, the recent acceleration of GDP per capita was due largely to longer working hours, not on a surge in productivity. The sole exception is France where there has been no increase in labor activity.

France's rigid labor market may provide a cushion when there is a negative shock, since dismissing workers is difficult and expensive for companies. But it's a problem when the economy is growing as companies fail to adjust quickly enough to rising demand.

Rules aren't the only thing holding back this adjustment. Most of unemployed lack qualifications that fit the labor market's needs. France's unemployment rate, at around 10 percent, suggests that this skills gap runs deep. As the minimum wage is high is France relatively to the median wage, the unemployment level will remain until job-seekers have the skills to match market demand at the prevailing wage level.

The solution is, in part, to make France's education system more inclusive, flexible and adapted to the needs of today's workplace. The recent El Khomri law allows companies, after a discussion with trade unions, to hire and to fire as the business cycle demands. The asymmetry of the law comes from the fact that it creates uncertainty for those employed under it. Those who are let go tend to remain unemployed for an extended period, the result of France's two-tiered labor market, in which there is high levels of security for those with permanent contracts and very little security for others. Since wages don't adjust downwards, even qualified people can remain on the dole for long periods when the economy is not growing well or there is a downturn in their industries.

The good news is that Macron clearly understands the root problem. His program seeks to provide a better balance between security and flexibility. He wants to reform France's education system to make it less rigid and provide more vocational offerings. Where previous presidents have tinkered with the system, he has promised real structural reform; if he succeeds, it will go a long way toward bridging the divide that made populist candidates so appealing to those who have no opportunities.

Of course it won't be easy; there is a very large and entrenched bureaucracy that will do its best to hold on to the status quo. That makes timing crucial. Macron must take advantage of the current strong economic momentum -- and his own honeymoon period -- to move quickly with his reforms if he is to lift France out of its low-growth trap and ensure that his own legacy matches the promises he made.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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    Philippe Waechter at

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