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France is sleepwalking towards economic ruin

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Joel Lewin


France has a large, wealthy economy. This is true today and it's been true for centuries. It's hard to imagine any other scenarios. But this complacency could see France sleepwalk to disaster. Clichés queue up to describe this downward spiral. 'Nothing lasts for ever'... 'the bigger they come the harder they fall'... and so forth

Near my home in Paris’ fifth ar­rondisse­ment, there is a very quiet one-way road. Few cars pass along it, but even so there is an ut­terly un­nec­es­sary pedes­trian cross­ing with traf­fic lights. You can imag­ine my sur­prise when the lights were sup­ple­mented by a traf­fic po­lice­man en­thu­si­as­ti­cally wav­ing his lit­tle stick at the oc­ca­sional pass­ing car, very self-im­por­tant but com­pletely su­per­flu­ous. You would think such ex­ces­sive deca­dence is the sign of a healthy econ­omy and a gov­ern­ment with more money than they know what to do with. Not quite.

Like a sloth on val­ium

France's na­tional debt is spi­ralling out of con­trol. The hexa­gon has snatched the ‘sick man of Eu­rope’ man­tle from trou­bled states such as Greece and Ire­land. Whilst the rest of Eu­rope has suf­fered the nec­es­sary pain and cut their deficits, the French gov­ern­ment has faced the cri­sis with all the vigour and fi­nesse of a sloth on val­ium. Eu­rope’s sec­ond largest econ­omy is sleep­walk­ing to­wards dis­as­ter.

Four cen­turies after Louis XIV’s fi­nance min­is­ter, Jean-Bap­tiste Col­bert, laid down the phi­los­o­phy, French gov­ern­ments are still re-bleat­ing, ‘big state good, free mar­ket bad’ like well in­ten­tioned Or­wellian sheep.  France’s prob­lems start with the huge state. The gov­ern­ment spends 56.6% of GDP, more than any other gov­ern­ment in the euro zone. In Ger­many it’s 44.7%, in Switzer­land 34.1% and even the calami­tous Greek gov­ern­ment only spends 53.6% of GDP. 

Why is it a prob­lem that the state spends so much? Surely state spend­ing can stim­u­late growth? This is true to an ex­tent, and more­over, France’s wel­fare sys­tem is rightly a source of tremen­dous pride. How­ever, a huge state re­quires huge taxes, and in France taxes are stran­gling busi­ness. The gov­ern­ment taxes busi­ness heav­ily, so busi­ness goes else­where, leav­ing France with a re­ced­ing in­dus­trial sec­tor.  Be­tween 2000 and 2013 salary costs rose 45% in France and only 24% in Ger­many. France’s com­pet­i­tive­ness is poor, so nat­u­rally busi­ness hops across the bor­der. France’s wel­fare sys­tem is sup­posed to im­prove qual­ity of life, but re­ally it’s hav­ing the op­po­site ef­fect be­cause the high taxes re­quired to pay for it drive away in­dus­try and jobs. As a re­sult un­em­ploy­ment is at a mod­ern era high of 11.1% and 25% for under 24s. It seems the French state's love is suf­fo­cat­ing.

Fight­ing François with cau­li­flow­ers and trac­tors

France’s na­tional debt is al­most two tril­lion euros. Piled in one dol­lar bills that would reach more than half way to the moon. In 2014 the gov­ern­ment will throw away 46.7 bil­lion euros on ser­vic­ing that debt alone. Ac­tion is ur­gently needed, but François Hol­lande will not coun­te­nance mak­ing the nec­es­sary cuts to the bud­get. Peo­ple re­sent Hol­lande’s in­ac­tion, and at 15%, his ap­proval rat­ing is the low­est a French pres­i­dent has ever had. But the French hate it even more when he ac­tu­ally does some­thing, protest­ing his every move like bats out of hell. Hol­lande is stuck be­tween a rock and a hard place. In­stead of ac­cept­ing this and tak­ing tough de­ci­sions, he fum­bles around in search of a non-ex­is­tent pil­low.

He has tried to levy taxes on mi­nor­ity groups in the same cow­ardly man­ner David Cameron has cut wel­fare for mi­nori­ties in the UK. Every­one knows the French love to protest, but no­body was pre­pared for quite such a fu­ri­ous re­ac­tion to Hol­lande’s tax in­creases. In Oc­to­ber, he tried to levy a tax on heavy ve­hi­cles. Farm­ers in Brit­tany blocked roads with trac­tors and moun­tains of cau­li­flow­ers. They wore red hats reminscent of a 17th cen­tury re­volt against Louis XIV and Col­bert. Hol­lande backed down. He tried to levy a cruel and bizarre tax of 15.5% on sav­ings schemes. He backed down after un­sur­pris­ingly an­ger­ing every­one from suc­cess­ful busi­ness­men to lit­tle old ladies who feared for their pen­sion sav­ings.

The ever-pre­sent panaceas of beer and danc­ing

With gov­ern­ment bor­row­ing cost­ing just 2.32% (ten year bond yield), France can con­tinue this slow sleep­walk to dis­as­ter for quite some­time. This means the bur­den of French debt, al­though as­tro­nom­i­cal, is still sus­tain­able be­cause they can keep bor­row­ing more to pay for it. How­ever, on 8 No­vem­ber, the Stan­dard and Poor debt rat­ing agency down­graded French debt for the sec­ond time. This should set alarm bells ring­ing, not least of all be­cause a debt down­grade is often a self-ful­fill­ing proph­esy. When a rat­ing agency down­grades a gov­ern­ment's debt, in­vestors de­mand higher in­ter­est on the money they lend, bor­row­ing costs rise and the gov­ern­ment is more likely to de­fault. The down­grade puts France at greater risk of de­fault sim­ply by say­ing France is at greater risk of de­fault. On a side note, this is just one of many rea­sons debt rat­ing agen­cies are at best far from use­ful, at worst down­right dan­ger­ous. 

Ev­i­dently things don't look good for the French econ­omy, and by the same token, for Eu­rope as a whole. Since there is noth­ing we as in­di­vid­u­als can do to al­le­vi­ate the doom and gloom around us, we have to fall back on our only guar­an­teed source of hap­pi­ness- that in­ter­nal foun­tain of buoy­ancy and mer­ri­ment we call the human brain. Cast bond yields and de­fla­tion far from mind, for­get you even read this and in­dulge in those ever-pre­sent panaceas - drink­ing beer and danc­ing.

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