Defenders of the French system quibble over labor-cost statistics in their efforts to prove that France is not so different from its main European trading partners. However, the facts of the last decade paint a different picture.
The burden of payroll taxes, together with overweening labor market regulation, stifles entrepreneurship. If Hollande’s tax hikes — on income, dividends, capital gains and capital assets — are not enough to deter entrepreneurs, the cost of hiring workers and the difficulty of firing them remain disincentives.
Far from signifying a pro-business shift, Hollande’s government’s response to the Gallois report reflects an enduring interventionist mentality. Instead of implementing deep and permanent cuts in payroll taxes on businesses, the government will give companies a 20 billion euro (US$26 billion) income-tax credit over the next two years.
And, with companies required to apply the rebated cash to investment and job creation, the government has portrayed the measure as a cut in taxes on labor that will boost employment. However, a temporary tax break cannot change incentives.
Once again, French lawmakers are acting on the conviction that they know better than market participants. Apart from promises to reduce employment regulation, the new measures boil down to officials directing state money to companies and projects of their choosing.
So the death rattle of the French economic model continues. What remains to be seen is how the end will come. And, whether it comes in the form of a capital strike by foreign bondholders, or of domestic labor strikes and wider social and political unrest, France’s leaders remain entirely unprepared for the inevitable.
Brigitte Granville is a professor of international economics and economic policy at Queen Mary, University of London.
Copyright: Project Syndicate