France: Unwillingness to deal with labour unrest will lead to financial crisis
France's inability to deal with its latest round of labour unrest and unwillingness to address its economic issues reveals entrenched resistance to serious change. Unless its authorities deal with its internal issues very soon, there will be potentially disastrous consequences for the country as well as trouble for Europe and the global economy. The facts are that France's current deficit is one of the biggest in the eurozone at 1-2% of GDP; its global export has fallen 2.5%; total real economy debt is around 280% of GDP, up 66% since 2007, though this understates real liabilities; the nation's debt is over $2.5tn, or 99% of GDP; France has dropped to 29th in terms of ease of doing business; labour costs are high and the market value is inflexible; welfare benefits are generous and fervently guarded; its large, multi-layered government sector is an inefficient and wasteful system; public spending is at 56% of GDP, the highest in the eurozone; and, furthermore, there is its high and rising debt burden, as well as the contingent burden of European bailouts.

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France may or may not perform well at Euro 2016, correcting an indifferent record since their World Cup success of 1998. But dealing with its economic challenges may be more difficult.

The current round of labour unrest and protests, ostensibly about reforms to labour laws which would make it easier to retrench staff, illustrates entrenched resistance to serious change of any kind that impinges on living standards and current practices.

French GDP growth is anaemic, being mainly less than 3 per cent per annum since 1999. France’s GDP per capita has lost ground to many developed nations, such as the US and UK, over the past 20 years. Unemployment is more than 10 per cent, having remained above 7 per cent for much of the past two decades. Youth unemployment is more than 25 per cent.

France’s current account deficit is one of largest in the eurozone at around 1-2 per cent of GDP, a reversal of small surpluses a decade ago. France’s share of the global export market has fallen by around 2.5 per cent. It has also lost market share within the eurozone. Industry’s share of GDP has fallen from 22 per cent to 16 per cent in the decade to 2010. Manufacturing has fallen to 11 per cent of GDP, about the same as in Britain and far less than in Germany or Italy.

Total real economy (government, household and business) debt is around 280 per cent of GDP, up 66 per cent since 2007. This understates real liabilities as it ignores unfunded pension and healthcare obligations.

France’s budget has not been balanced in any single year since 1974. French public debt is more than $2.5 trillion, or 99 per cent of GDP. The current budget deficit is more than 4 per cent of GDP. France has repeatedly sought more time to meet the mandated EU target of 3 per cent. With characteristic Gallic insouciance, Prime Minister Manuel Valls told legislators that: “We are not asking. France makes its own decisions.”

In the World Economic Forum’s competitiveness rankings, it ranks 21st, behind Germany (sixth) and Britain (eighth). In World Bank studies, France has dropped to 29th in terms of ease of doing business.

Labour costs are high and the market is inflexible. The labour code, which runs to more than 3,800 pages, is complex and restrictive. A requirement for a firm with 50 or more employees to comply with obligations such as a works council mean that there are twice as many firms with 49 or less employees, with corresponding loss of scale economics.

Welfare benefits are generous and zealously guarded. Modest reforms, such as the Sarkozy government’s attempt to increase the minimum retirement age from 60 to 62, have failed. The agricultural sector and national champions in automobiles, heavy engineering and aerospace are protected and enjoy explicit or implicit subsidies.

Overseeing this system is a large and multi-layered government sector, nicknamed mille-feuille for its resemblance to the sweet cream slice made of layer upon layer of paper-thin puff pastry. A 2010 book Absolument Debordee (Totally Snowed Under), penned by an anonymous local council official, described an inefficient and wasteful system. France has 90 civil servants per every 1,000 inhabitants against 50 in Germany. The government employs 22 per cent of the workforce, well above the European average. Perhaps this reflects General Charles de Gaulle’s observation about the difficulty in ruling “a country with 265 different cheeses”.

Public spending is around 56 per cent of GDP, the highest in the eurozone, some 5 per cent above Sweden and around 10 per cent above Germany. French public spending as a percentage of GDP was comparable to Germany and well below Sweden 15 years ago. The welfare system consumes 40 per cent of public spending, while the remainder goes towards central and local government costs. While public expenditure is not necessarily unproductive, the evidence suggests that in health, education, vocational training, French spending does not match outcomes when measured against comparable countries. France’s public sector is now a deadweight loss, reducing economic growth. A 2005 report on French public finances concluded that “each time a new problem has arisen in the past 25 years, our country has responded with more spending". This accounts for the fact that, irrespective of the economic environment or the government of the day, it has been difficult to control public spending.

An additional complication is its high and rising debt burden as well as the contingent burden of European bailouts.

The persistent issue is the unwillingness to address the issues.

President Mitterrand was fond of saying that “il faut donner du temps au temps” (time must be given time to do its work). For the past 15 to 20 years, France has been promising reform and improvement. Self-obsessed with its past glories, France appears incapable of recognising its decline and is increasing ossified by its inability to engineer the required changes.

Unfortunately, time is now running out, with potentially disastrous consequences for the nations themselves as well as Europe and the world. If unaddressed, a financial crisis as well as a social and political crisis is likely. This would have potentially disastrous consequences for the nation as well as the troubled European project and the global economy.

Satyajit Das is a former banker and author. His latest book is 'A Banquet of Consequences'