Tue, Mar 20, 2012 - Page 9 News List

France’s day of reckoning an inevitability and heads will roll

By Brigitte Granville

As the French presidential election looms, the country is approaching a breaking point. For three decades, under both the right and the left, the country has pursued the same incompatible, if not contradictory, goals. With the sovereign-debt crisis pushing French banks — and thus the French economy — to the wall, something will have to give, and soon.

When the crunch comes — almost certainly in the year or two following the election — it will cause radical, wrenching change, perhaps even more far-reaching than former French president Charles de Gaulle’s coup d’etat, which led to the establishment of the Fifth Republic in 1958.

Most French politicians and bureaucrats call such notions scaremongering. After all, are not key indicators such as debt ratios or budget-deficit trends worse in the US and the UK? Indeed, France’s predicament might seem comparable with the Anglo-Saxons, were it not for the French political class’ beloved baby, the euro.

While the euro has not caused France’s economic problems, its politicians’ commitment to the single currency represents an insurmountable barrier to solving them. The basic problem is that the country’s super-generous welfare state (public spending was about 57 percent of GDP in 2010 compared with 51 percent in the UK and 48 percent in Germany) stifles the growth needed for the euro to remain viable.

The most serious structural flaws concern high payroll taxes and labor-market regulation, which make it difficult — or at least prohibitively expensive — for firms to reduce their workforce when business conditions worsen. The Organisation for Economic Co-operation and Development (OECD) reports that in 2010, France’s “tax wedge” (income taxes plus employee and employer social-security contributions minus cash transfers as a percentage of total labor costs) was at least 13 percentage points above the OECD average at every level of household income.

The result has been elevated unit labor costs relative to France’s peer group (especially Germany) and stubbornly high unemployment. During former French president Valery Giscard d’Estaing’s term in the 1970s, unemployment rose every year, reaching 6.3 percent by 1980. Former French president Francois Mitterrand promised rapid growth and lower unemployment when he came to power in 1981, but presided over an economic slowdown and rising unemployment. By 1997, unemployment reached 11.4 percent and dipped below 8 percent in only one year since then (2008).

High unit labor costs and unemployment rates are responsible, in turn, for reducing the trend rate of economic growth, mainly owing to underutilized labor, while the combination of lackluster growth and an ever-mounting welfare burden has resulted in chronic budget deficits. The last surplus was in 1974.

The current election campaign is accordingly centered on France’s fiscal position. Everyone agrees that deficit reduction is required, while differing on how to go about it. French President Nicolas Sarkozy’s proposed cure is to boost growth by reducing the tax burden on employers, while simultaneously hiking the rate of value-added tax. His main opponent, Socialist leader Francois Hollande, would impose higher taxes mainly on the wealthy and the financial sector, but also on big business.

With the only effective solutions — full-blown eurozone political union or abandoning the euro — ruled out, muddling through is all that is left. Another name for this approach is “transfer union,” which implies relentless economic austerity and declining living standards because strong countries — first and foremost, Germany — are determined to limit their liability for bailing out deficit countries by making all transfers conditional on tough budget retrenchment.

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