Tag Archives: France

France 2005: the quest for greatness?

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It has now been a year and a half since I moved to France. I am not going to bore you with all the domestic challenges the move caused me, do not worry, but I need to mention this since I have only just begun to explore life in France. This post about France will therefore be rather impressionistic. Yet I am sure our esteemed guest poster Emmanuel, and hopefully our French readers, will chime in with corrections, elaborations and the like. I also need to mention that I live in the countryside of Brittany, which means there is some distance between me and whatever happens in Paris and the rest of France.

The first thing I noticed about France is that my day-to-day life has not changed much compared to my extended stay in Belgium. People basically talk about the same things: life is expensive, the weather is relatively mild for the time of the year, the bathroom needs painting, sports, etc. And naturally there has been some cultural talk, since I am a new kid on the block with a heavy foreign accent, mostly about culinary and linguistic differences. Every now and then the conversation turns to politics and society. Rarely so, but still.
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How anti-American are the French?

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Not as much as you might think, argues The Economist in a long, Christmas-special piece about French anti-Americanism (article freely available to non-subscribers) :

In one 2004 poll, 72% of the French had a favourable view of Americans, more even than in Britain (62%) or Spain (47%). Some 68% of those questioned in another poll the same year said that what unites France and America was more important than what separates them. During the 60th anniversary of the Normandy landings in 2004, politicians were frosty, but the people at large showed an outpouring of gratitude to American veterans.

It’s true that there is a big gap between the view of the U.S. (pretty bad) and the view of the American people (quite good) in France, a sure sign that a substantial part of what is regarded as anti-Americanism is mainly driven by anti-Bushism.
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A new hope?

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Many thanks to David for offering me a chance to raise my profile just before the second edition of the Satin Pajama Awards with a two-weeks guest-blogging stint here at AFOE.

For the 99% of you who don’t already know me, I usually display my limited knowledge of economics and politics at my own blog Ceteris Paribus and also, though not that often since a certain fateful 29th of May, at the group blog Publius. Oh, and I’m also French, which explains my awful English style and may or may not be a good reason to disregard my analysis about European matters.

Anyway, enough about me, since the quite unexpected European budget deal of last night offers plenty of things to write about.
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The Pébereau Report

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According to the French writer Rabelais debt and deceipt are almost invariably inextricably linked. So it is appropriate that it should be a French banker – Michel Pébereau – who takes it upon himself to try to bring this harsh reality home to a French public which still seems excessively steeped in the finer details of the arts of self-deception. Pébereau does not mince words: over a quarter of a century century French public policy has accumulated for itself a national debt has neither supported economic growth nor reduced unemployment. The debt is “asphyxiating” and unless the State acts to reduce its spending now France will “lose control of the financial situation” before the end of the decade. Indeed so stark is the picture Pébereau paints that French economy minister Thierry Breton, on reading the report, was moved to comment: “Unbeknownst to them, our children are already financing part of our standard of living.”
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Sarkozy Cancels Trip To Martinique and Guadeloupe

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I still feel very ambivalent about Nicholas Sarkozy. Clearly France needs reform, and he seems to be the most likely politician to bring it, but some of his words and deeds worry me. His attitude towards positive discrimination as a step towards equality of opportunity for the ‘new French’ is obviously a point in his favour (at least for me it is), on the other hand his ‘tightening’ of the immigration laws is a step in entirely the opposite direction. France needs to resolve its ability handle cultural diversity, not turn its back on it. Today we have another example of what makes me nervous:

“France’s colonial past caught up with Nicolas Sarkozy on Wednesday as the interior minister cancelled a Caribbean trip to avoid protests over what some claim are political attempts to glorify the country’s history as a colonial power.”

“The last-minute cancellation of Mr Sarkozy’s trip to the French overseas territories of Martinique and Guadeloupe is the latest sign the government has raised racial tensions by introducing a law calling for schools to teach the “positive role” of colonisation.”

In a globalised world, internal politics and external politics are hard to separate, especially when there are parts of France which lie outside the geographical frontiers of Europe. My point would not really be whether everything was bad about colonialism or not, but about what someone who claims to be in favour of ‘deregulation’ is doing introducing a law which states:

“the school syllabus should recognise, in particular, the benefits of the French presence in overseas territories”.

Sobering News

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First off, Dave at MacroBlog has a good summary of the core of the economic policy programme adopted by the new German government. He also has some to-the-point comments about ECB credibility issues

But the big news today must surely be the surprising state of the European consumer . Perhaps the most indicative reading on the situation comes from a report from business consultants Deloitte which states that spending on xmas gifts is expected to fall this year by an average 3 per cent (year-on-year) across nine European countries. Revealingly they find that 49 per cent of Europeans believe their economies are currently in recession.

Now that German domestic consumption is declining comes as no surprise. Economic theory offers us sound explanations as to why this might be the case, nonetheless the pace at which this decline is progressing is pretty striking:

Third quarter growth figures for Europe’s largest economy released yesterday showed that after five years of stagnation, Germany’s economy is locked in a schizophrenic phase. On the one hand the country’s robust exports, which rose 4.7 per cent from the second quarter, are finally translating into stronger investments, up 2.2 per cent.

But consumption, an essential ingredient of a healthy recovery, fell for the third consecutive quarter, pressed by high unemployment, stagnating disposable income and a broader crisis of confidence.

Hanging as a twin threat over this one-legged recovery are the prospect of an imminent rise in eurozone interest rates and Ms Merkel’s pledge to cut spending and raise taxes to restore the country’s public finances by 2007.

However, the recent news from France does come as a surprise. Economic data from France had been rather more encouraging lately, and thus the fact that French consumer spending on manufactured goods declined for a second successive month in October – down by 0.6 percent from September, when it fell a revised 0.3 percent – does come as something of a surprise, and is probably like a bucket of icy water over in Brussels and Paris, and, possibly more importantly, over at the ECB in Frankfurt.

It was only last Monday that Morgan Stanley economist Eric Chaney was taking IMF chief Rodigo Rato to taskfor the latter’s argument that “it would be good to see more internally driven recovery” before starting to normalise interest rates. Chaney took the opportunity to make a full-frontal-assault on what he calls “the legend that only exports explain euro area growth”.

“Since 2003, the contribution to growth of external trade has been constantly negative or null for the euro area, while almost constantly positive for Germany. The French GDP data out on November 18 are confirming this once again: French final domestic demand was up 0.9% in Q3 (3.5% SAAR), driven by strong consumption (0.7%Q despite a sharp drop in food consumption) and even stronger corporate capital spending (1.1%Q). ”

Now normally I would be agreeing with him, since as he says the ‘legend’ is derived from the fact that many analysts take Germany as a proxy for the euro area, and this can be deeply misleading. But this latest round of data counsel caution (and maybe some of that caution could have been reflected in Jean-Claude Trichet’s performance last Friday, at least if the Central banker’s job is to stay ahead of the curve it could have been). Lesson: don’t make yourself a hostage to fortune if you don’t want to end up being hoisted on your own pettard. (And Btw: Touché Señor Rato).

More Growth In The Eurozone

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I think I’d better rephrase that: more overall growth, but a very mixed bag. In deriving aggregate numbers for the zone, four big economies really matter: Spain, France, Germany and Italy. Now each of these economies actually has different characteristics, so it is not clear what ‘the general picture’ means here.

Spain is the European economy whose current growth characteristic seem to resemble most those of the USA: above average growth (around 3.5% per annum), high dependency on housing and construction for the ‘extra growth’, high and rapidly growing private indebtedness (around 20% y-o-y) and a large current account deficit. Where Spain doesn’t resemble the US is in productivity, which has been more or less negative in recent years.

France is , as I’ve been suggesting, relatively ebullient despite the lack of all those labour reforms, and seems to be ‘on a roll’ at the moment. Driven by internal consumer demand and exports France managed an annualised 2.8% in the third quarter. Ironically, possibly France represents the big-four Eurozone economy with the most sustainable and balanced growth trajectory right now.

The German economy is growing at an unexpectedly high rate, but this extra-spurt is virtually all explained by the rapid increase in exports (helped of course by the fall in the euro).Investment, fuelled by the demand for all those exports, was also up. Meanhwile internal consumer demand is possibly even falling. (Growth in the third quarter was at an annual rate of 2.4% up from an annualised 0.8% in the second quarter).

And Italy, which as I keep mentioning is definitely now the ‘poor sister’ of the eurozone, with an identity crisis about what kind of economy it actually is, and a rapidly ageing population producing huge fiscal pressure. (On this see Morgan Stanley’s Vicenzo Guzzo yesterday). Italian growth actually bucked the trend in the third quarter and was lower than in the second quarter (dropping from a 2.8% annual rate to a 1.2% one).

All of this leaves me with the feeling: ‘Eurozone’ which eurozone?

Something Is Moving

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The FT reports this morning that France may be about to ease restrictions on certain highly regulated service industries and on business start-ups as part of a package to create jobs in poor suburbs. It is possible that these initiatives might be a test bed for broader economic reform throughout France. French finance minister, Thierry Breton, told the Financial Times:

France had failed its immigrant communities, largely housed in bleak areas of high unemployment where rioters have left one pensioner dead and burned 7,000 cars. “We have put a lot of money into the suburbs over the past 20 years,” Mr Breton said. “But obviously it wasn’t enough. We need to work on how to create more jobs and growth in those areas.”

Among the initiatives being considered is an easing of regulations in the specially designated “zones franches”. Currently companies are encouraged to locate in these areas of high unemployment through a limited range of tax breaks. However, the Finance Ministry is considering a form of “positive economic discrimination” that would exempt companies from certain rules in place elsewhere. These include relaxing professional qualifications on businesses such as hair salons and taxi companies, and increasing the level of state guarantees for business loans.

The French Consumer Is Alive And Well

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Some good news on the economic front to counter all that bad news on the social one. The French economy grew at an annualised rate of 2.8% in the third quarter of 2005 (or by 0.7% over the prebious quarter). Driving this growth: strong spending by French consumers. At this rate the French economy will be growing at a faster rate than the UK one in 2005.

France’s economy expanded at the fastest pace in more than a year in the third quarter, suggesting European growth is accelerating and providing central bankers leeway to raise interest rates. Gross domestic product increased 0.7 percent from the second quarter, when it rose 0.1 percent, the government said today in Paris.

In the euro region, where France accounts for about one- fifth of the economy, growth probably accelerated to about 0.4 percent in the third quarter from 0.3 percent the previous three months, the European Commission said Oct. 13. This quarter, the economy may expand 0.6 percent, it said. French consumers stepped up spending as oil prices retreated from a record and government-subsidized hiring pushed down unemployment from a 5 1/2 year high.

The French Unrest and the Labour Market

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Morgan Stanley’s Eric Chaney has what I consider to be a very sensitive and perceptive analysis of the economic backdrop to the French urban unrest:

Turning to economic causes, many analysts have pointed to mass youth unemployment as the main cause of the political unrest in low-income suburbs. The numbers are striking: the French unemployment rate reached 21.3% in the 15-24 age bracket in 2004, vs. 13.4% for the OECD as a whole. However, the headline unemployment rate is misleading because, at the same time, the participation rate of the 15-24 age group is particularly low in France: 37.5%, vs. 49.9% in the OECD. Practically, this means that 7.8% of the population aged between 15 and 24 is unemployed in France, vs. 6.5% in the OECD. The difference is not that large. What makes France different from other countries is the very low participation rate of young people, not particularly massive unemployment. In other words, the young in France take fewer jobs than their counterparts in other developed countries……”

“That brings us to a more fundamental point: why is it so difficult to create jobs in France? I have discussed this point in a previous note (“Making France Work”, June 21, 2005). In my view, the causes of the job disease fit reasonably well with the “insider-outsider” model developed by labor economists, provided that it is extended to products and services markets. I will elaborate only on labor market issues, starting with the minimum wage, which I believe is the major hurdle to job creation for young and less skilled workers. However, highly regulated product and services markets, which allow various interest groups to keep markets closed to competition and thus reduce employment opportunities, are another important cause of the job disease……….”

“Originally, the minimum wage was introduced as a protection against excessive employers’ bargaining power (“monopsomy” cases). Over the years, it became a protection against competition from cheap labour. Many studies on French data have shown that a rise in the minimum wage is very negative for employment. Although estimates may differ, they converge qualitatively. For instance, Bernard Salanié (Columbia University) and Guy Laroque (CREST) estimated that a 1% rise in the minimum wage could cost 29,000 jobs (“Une décomposition du non-emploi en France”, Economie et Statistique N331, 2000-1). As a consequence, each minimum wage rise, often seen as a “social measure” in French media, would increase the proportion of people living only on social benefits. This point is particularly important for young and low qualified workers, whose parents are often also unqualified: they suffered twice from the generous increases in the minimum wage in terms of fewer job opportunities for them and their parents and, thus, a lower income for their household.