RaboResearch - Economic Research

Country Report France

Country Report


France flag

In the short-term at least, further fiscal austerity and weak employment growth will continue to constrain economic growth. Furthermore, the French economy faces many structural challenges, including a relatively weak competitiveness position, high unemployment and weak public finances compared to other Western European countries. But because of highly developed institutions and a strong private sector France still has robust fundamentals.  

Strengths (+) and weaknesses (-)

(+) Low private sector indebtedness

French households’ and corporate debt is relatively low, and private sector savings are relatively high compared to other eurozone countries.

(+) Strong public institutions

The infrastructure in France is among the best in the world, with outstanding (energy) infrastructure and communications. Furthermore, potential growth is supported by the quality and quantity of the education system.

(-) Labour market rigidities and low corporate profit margins

Structural rigidities in labour markets combined with comparatively low corporate profit shares have diminished business innovations, thereby undermined the economy’s growth potential and contributed to a loss of export performance.

(-) High government debt and deficit

In 2013, government debt reached 93% and deficit was 4.3%, both in terms of GDP. Although public spending is being cut, the deficit will probably not be brought down to 3% in 2015, meaning France will not keep its 2015 deficit target as mandated by the European Commission. 

Key developments

1. A hesitant recovery

Although the French economy performed relatively well during the crisis, GDP growth was only 0.3% in 2013 and is projected at 0.8% for 2014. Furthermore, the economy still suffers from a high unemployment rate (10.4% in February) and decreasing house prices in 2013. The weak outlook for the short-term is supported by uncertain job prospects and fiscal austerity which impede household and government spending. On the positive side, as private debt is relatively low and unburdened with balance sheet repair issues, private demand is more inclined to respond to an improvement in confidence. Recent labour market reforms (which are described in more detail below) might slightly increase participation, but given prolonged weak corporate profits, firms may initially rebuild their profit margins rather than hire new employers. Looking forward, sentiment indicators support this, as they predict relatively low employment growth in the coming months.

2. Move towards pro-business policy still not enough

Since real wages increased substantially during the past decade, France has lost price competitiveness. In order to restore its competitiveness position and transform France from a consumption-driven economy into an export and investment driven economy, structural reforms in the labour market are crucial. Although president Francois Hollande initially did not make much effort to restore competitiveness and ease labour market regulation, he is recently moving towards a more pro-business policy. The Labour Law Reform Act, passed in June 2013, paves the way for more flexibility on working hours and wages. Pension reforms in January 2014 increase the contribution period required for a full pension from 41.5 to 43 years. Furthermore, the ‘responsibility pact’ aims to reduce labour costs and increase business competitiveness. It includes a structural cut in payroll taxes reaching €30 billion from 2017, a simplification of  business regulation and a reduction of the number of levies on companies. Although the latter will result in only modest savings for business, it will lower administrative burdens. The implementation and efficacy of these policy initiatives are counteracted by the left wing of the Socialist party, who argue for a re-launch of public investment and consumption. Furthermore, France’s poor history of implementing painful reforms and fiscal discipline does not facilitate the policy measures. Although the currently announced reforms are a step in the right direction, they are unlikely to be sufficient to tackle the structural challenges France is facing. Even when keeping in mind the results of the recent municipal elections, which support the pro-business policy as centre-right and far-right parties won at the cost of the left Socialist party, we do not expect additional reforms. 

Figure 1: Nominal labour costs
Figure 1: Nominal labour costsSource: Eurostat
Figure 2: Budget deficit France
Figure 2: Budget deficit FranceSource: Eurostat

3. Government refuses public deleveraging

To fund the responsibility pact, but also to reduce the government deficit, public spending will decrease with an extra €50 billion from 2015-17, on top of the €15 billion savings already planned for 2014. This will unlikely be sufficient to bring the budget deficit to 2.8% of GDP in 2015, which was required by the excessive deficit procedure (EDP). This would mean that France misses its budget deficit-reduction target again and therefore risks a penalty from the European Commission (EC). As with the structural reforms, it is uncertain whether the France government will make further cuts beyond what is already announced. This of course depends partly on the demands of the EC. If the EC ends up giving France more time, this will likely be in return for a firm commitment to implement reforms. We believe this is the best case scenario for France (though still painful), as structural reforms could strengthen in the long run the potential growth outlook.  Despite high government debt and deficit the French government maintained good access to the bond market. France’s debt affordability is supported by low funding costs, the strong financial position of the private sector and the high government revenues (53% of GDP in 2013), although the latter leaves little room for tax increases. Furthermore, debt-payment risks are limited by the favourable debt profile, as average maturity is around seven years. However, given France’s weak fiscal track record, the uncertainty of deleveraging public debt and the weak economic outlook, the government may lose investor confidence and thereby debt affordability. It is therefore essential for the French government to improve its fiscal stance.

Factsheet of France
Factsheet of FranceSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

France is the world’s fifth and Europe’s second largest economy in terms of nominal GDP. The country benefits from very good infrastructure and high quality of the education system. France’s economic growth has been primarily driven by domestic consumption in the last decade. The weak position of the France’s public finances is compensated by the solid balance sheet of the private sector, as households possess large net financial assets (300% of disposable income in 2013Q3). Despite being a widely liberalised economy, the government plays a significant role in the economy, as government spending reached 57% of GDP in 2013. Furthermore, the government owns shares in companies in a wide range of sectors and the labour market, including wages, is highly regulated. In fact, France’s labour market is ranked 116th according to The Global Competitiveness Report 2013-2014 because of strict firing and hiring rules and a highly distortive tax system. Due to sharp rises in non-wage costs such as social charges, French nominal wage costs are among the highest in the euro-zone. These labour market rigidities combined with an insufficient focus on innovation have undermined France’s competitiveness position. Notwithstanding the fact that France’s aging problem is expected to be relatively mild compared to other European countries, it remains an important challenge to keep control over age-related spending. Especially since the labour participation rate in France is among the lowest in Europe. A raise of the minimum contribution period required for a full pension from 41.5 to 43 years is a step in the right direction. 

Economic indicators of France
Economic indicators of FranceSource: EIU
Carlijn Prins
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1929 6455

naar boven