Special report

So much to do, so little time

France is slowly heading towards a crisis, says John Peet. Can the country be reformed before it is too late?

THE HALL OF mirrors in the palace of Versailles, near Paris, where the peace treaty was signed in 1919, has been sparklingly restored. Yet as you follow the hordes of (mostly Chinese) tourists around, you notice that the reflections in the ancient looking-glasses are slightly distorted. Versailles’s creator, Louis XIV, who famously asserted that “l’Etat, c’est moi”, stood for a certain kind of statism that survives to this day, and similarly distorts the image of modern France. There are free-market successes but also too many instances of excessive state control; economic triumphs but also failures; northern puritanism but also a certain southern laxity. These contrasts make it easy to present the country in both a negative and a positive light.

Start with the negative. Public spending accounts for almost 57% of national output, the public debt stands at over 90% of GDP (and rising) and the country seems to be running a near-permanent budget deficit. It is no surprise that in January France lost its AAA grade from Standard & Poor’s, a rating agency. Wealth, profits and high incomes are heavily taxed, the rich are routinely abused and people are instinctively hostile to capitalism. Everything from the labour market to pharmacies to taxis is heavily regulated: no wonder would-be entrepreneurs feel discouraged. No entirely new company has entered the CAC-40 stockmarket index since it started in 1987; redundancies can lead to endless court proceedings; and trade unions and protesters tend to take to the streets at the first hint of reform. It adds up to a deeply anti-business culture.

Yet there is also a much more positive side to the country. It is the world’s fifth-biggest economy and sixth-biggest exporter. In the first half of 2012 it was the fourth-biggest recipient of foreign direct investment. It has more big multinational companies in the global Fortune 500 than Britain. The French are especially strong in top-end goods and services: luxury goods, food processing, pharmaceuticals, fashion. The infrastructure, especially in transport and energy, is second to none. Although many universities are mediocre, the grandes écoles, such as the Polytechnique and the HEC business school, are world class. The health system is widely admired. And unlike most other European countries France has a relatively favourable demographic outlook, with a birth rate just above replacement level.

The two images are clearly both sides of the same coin. Most French people enjoy high living standards. Over the past year the financial markets have been kind to France, even after the election of a Socialist president and government, allowing it to borrow at exceptionally low rates. Yet growth has stalled and the economy is on the brink of recession for the second time in five years (see chart 1). Several big companies are planning to follow Peugeot’s example by closing factories. Unemployment has recently risen above 3m, a rate of over 10%. Youth unemployment is closer to 25%, and much higher still in the banlieues around Paris and other big cities where ethnic minorities are mainly concentrated.

As its public-spending numbers suggest, France is also more attached to a big role for the state than any other European country. The notion that governments must steer the economy has deep historical roots, going back at least as far as the state-financed Canal du Midi under Louis XIV. His finance minister, Jean-Baptiste Colbert, founded the Saint Gobain mirror factory and took over the Gobelins tapestry firm. In the 18th century the state established the royal saltworks at Arc-et-Senans in the Doubs. High tariff barriers buttressed the policy of dirigisme. After 1945 France again turned atavistically to the state to draw up five-year plans for the economy.

France’s position as the world’s leading tourist destination is no accident, and not just because of the scenery or the food. To many people it stands for a dream, encompassing the revolutionary ideals of liberty, equality and fraternity and epitomising the taming of uncontrolled markets, the promotion of culture, literature and intellectual debate, even the very notion of civilisation. Such riches can easily lead to an unattractive arrogance, but they explain much of the country’s enduring appeal. They are also among the reasons why France and the French are so resistant to change: why would you want to take the reformer’s knife to a country that represents the peak of civilisation?

Certainly France has been more reluctant and slower than any other country in Europe to reform its labour-market, pension, social-security and welfare systems. It largely skipped the radical shake-ups that happened in the Netherlands, Scandinavia and Britain during the 1980s and 1990s and in Germany in the 2000s. And, as the IMF recently pointed out, it is now being left behind by reformers in Italy, Spain, Greece and Portugal.

One consequence is a pronounced erosion of competitiveness. When Europe’s single currency came into being in 1999, French labour costs were below German ones and the country had a current-account surplus. Now its labour costs are far above Germany’s and it has a large and rising current-account deficit.

All this has meant a grim inheritance for François Hollande, who was elected French president in May. Mr Hollande is only the second Socialist Party candidate to win the presidency since the start of France’s Fifth Republic in 1958. His victory over the centre-right incumbent, Nicolas Sarkozy, came 31 years after François Mitterrand’s in 1981. Mitterrand was re-elected in 1988, but during his 14-year presidency his party twice lost its majority in parliament. The Socialists’ most recent stint in government was in 1997-2002, when Lionel Jospin served as prime minister in “cohabitation” with Jacques Chirac, Mr Sarkozy’s predecessor.

Hollande’s mandate

At least in theory, Mr Hollande is now more powerful than Mitterrand, and indeed than any Fifth Republic president since Charles de Gaulle. His party controls both parliamentary chambers and most of France’s regions, departments and municipalities. The main centre-right opposition is fighting a bitter internal leadership campaign.

After the Socialists won the National Assembly election in June, Mr Hollande appointed Jean-Marc Ayrault, previously mayor of Nantes, as his prime minister. Both men lack ministerial experience, and indeed business experience, as do most members of their team. This may be one reason why they have run into so much criticism from French business for raising taxes.

Mr Hollande’s victory was narrower than most opinion polls had predicted, and he owed it in large part to voters’ dissatisfaction with Mr Sarkozy. As it happens, over the past two years most incumbent euro-zone governments have been turfed out by their electorates. But Mr Sarkozy also lost the voters’ respect by making his a “bling-bling” presidency, starting with a flashy celebration party and an ostentatious yacht trip and continuing with a divorce from his wife of ten years and marriage to Carla Bruni, a singer and former model. In contrast, Mr Hollande campaigned under the reassuring label of “Mr Normal”.

The trouble is that the times are not at all normal. During this year’s two election campaigns, for the presidency and for parliament, both main parties largely ignored the dire condition of the French economy and the euro crisis, instead offering attacks on bankers, empty talk of greater social protection, a controversy over halal meat and the usual ragbag of promises. Mr Hollande has honoured as many of these as he can, including cuts in ministers’ pay, a partial rollback of Mr Sarkozy’s increase in the retirement age from 60 to 62 and the imposition of new taxes on companies and the rich, including a 75% top tax rate on incomes above €1m ($1.3m).

Yet Mr Hollande’s approval rating has plunged even faster than Mr Sarkozy’s did in 2007, to below 50%. In one recent poll, almost two-thirds of respondents said they were “discontented” with Mr Hollande’s actions since his election. The mood of ordinary French people is, indeed, startlingly bleak. But then the French are born pessimists. In one poll in 2011 four-fifths of the German respondents were positive about the future whereas four-fifths of the French ones were negative. Another poll found that no other Europeans were as pessimistic as the French.

Liberal commentators, including this newspaper, fretted from the outset that Mr Hollande and his team had not grasped the nature and extent of the crisis facing France, still less understood the case for reforms that the economy so urgently needs. Some even drew parallels with the new Mitterrand government in 1981, which embarked on widespread nationalisations, a public-spending spree and an attempt to soak the rich through higher taxes. Back then the franc tumbled, and only two years later the Socialist government reversed course under the influence of Jacques Delors as finance minister.

Liberal commentators fretted that Mr Hollande had not grasped the nature and extent of the crisis facing France, still less understood the urgent need for reforms

Mr Hollande is no Mitterrand. Indeed, his first experience in politics was working with Mr Delors. Like him, he is on the right of the party, in many ways more of a European Social Democrat than a Socialist. He and Mr Ayrault (who speaks fluent German) are also fascinated by Germany’s recent success. In Paris there is talk about the example of Gerhard Schröder, a Social Democratic German chancellor who in 2003 introduced a package of far-reaching reforms, including measures to liberalise the German labour market. But sceptics note that he waited until his second term to push through these reforms, and that he promptly lost the subsequent election.

It is widely held in France that in office the left often turns out to be more reformist than the right. In truth all parties in France are essentially statist in outlook, and true liberals are rare. Yet when Mr Jospin was prime minister, it was evident that a leftist government was capable of privatising and liberalising more than its centre-right predecessor, at least once it had brought in the symbolically important 35-hour working week. Certainly the left ought to be better at getting the unions to accept change.

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Mr Hollande has begun to talk about French competitiveness, though he gave a lukewarm reception to the recent Gallois report on the subject. Despite his campaign calls for less austerity and his (swiftly broken) promise to renegotiate the European fiscal compact, he has repeatedly insisted that he will stick to his target of cutting the budget deficit for 2013 to 3% of GDP and aiming to reach balance in 2017. The budget in late September included just about enough tax increases and (more modest) spending cuts to satisfy the markets.

The biggest concern is not that Mr Hollande will repeat the Mitterrand government’s extravagant follies of 1981. Nor is it any longer, as in May, that he refuses to admit that France is in economic difficulty. It is that on this occasion there is so little time for him to act. In 1981 the economy was growing, the budget deficit was small, the national debt stood at just 22% of GDP and France still had its own currency. Today the economy is at a standstill, the deficit is above the 3% ceiling, the debt is over 90% of GDP and France is in the euro zone. The euro crisis keeps going, and although France is still able to borrow at low cost, market sentiment can switch suddenly.

A favourite saying of Mitterrand’s was that “il faut donner du temps au temps” (time must be given time to do its work). Mr Hollande has spoken of two years to pursue reforms. He may find he does not have even that long.

This article appeared in the Special report section of the print edition under the headline "So much to do, so little time"

The time-bomb at the heart of Europe

From the November 17th 2012 edition

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