In France, les poulets are coming home to roost

Last week the French economy was supposed to have something of a re-launch – along with the career of President Hollande. But things did not quite work out that way – on either count. I will leave the president’s personal life to others. I am interested in the bigger question of whether it is going to be possible to reform the French economy radically.


The president’s words sounded good to all those who think that France has to make a definite turn towards more markets and less regulation to avoid economic relegation, if not calamity.


M Hollande spoke of the absolute necessity to cut public spending and of the need to switch from demand-side to supply-side policies. That is code for a switch from policies that centre on more public borrowing to policies that centre on structural reform.


He announced that the “family welfare” tax on firms would be scrapped. This would cut payroll taxes by €30bn (£24.8bn), which would reduce firms’ labour costs by about 5pc. And he restated his commitment to reduce state spending by €50bn in 2015-17, simplifying the tax system, putting social security on a firmer footing and reducing layers of public administration. In the circumstances, I am surprised that he did not also commit himself to the abolition of the baguette and the croissant.


In Britain, the New Labour era has permanently scarred us into cynicism. Such cynicism is surely justified with regard to President Hollande’s reform programme. First, the cut in labour costs is not due to take effect until 2017, by which time French employers will have endured another three years of huge social charges and cost uncompetitiveness against trading partners in Europe and beyond. Second, there is the issue of where the money is to come from. It seems that about €20bn will come from scrapping a tax credit for firms, unveiled earlier in the president’s term. So this amounts to a case of robbing Pierre to pay Paul. Meanwhile, the other €10bn is going to come from spending cuts, as yet unspecified. Announcing such things is easy enough but when you actually come to pinning down what is going to be cut, that is when things get difficult.


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Third, the reductions in social charges are part of a “responsibility pact”, and to benefit from them, firms must agree to create jobs in return. How on earth this is going to be implemented heaven only knows. It is a clear illustration of how socialists don’t really understand the market economy. It works through incentives and people being left alone to get on with things. Unemployment in France is not high because firms are incompetent or exploitative. It is high because labour costs are high, the state imposes massive charges on employers, the labour market is heavily regulated, it is difficult to get workers to work flexibly and, if something goes wrong, it is devilishly difficult to cut the workforce.

Of course, major reform is possible. Like her or loathe her, everyone has to admit that Mrs Thatcher introduced really radical reforms in Britain in the 1980s. In Germany, the labour market was transformed by the so-called Hartz reforms of 2002-2005. The result can be seen in the low level of German unemployment today. But reforms in France? The optimists point to the fact that President Mitterrand did a radical about-turn in the 1980s, and they suggest that Hollande’s recent apparent volte-face could be as significant.

But that was Mitterrand. The broader picture is that French governments have a habit of backing down in the face of pressure from groups who see themselves threatened by market reforms. Indeed, there was an instance of this very recently. The government had planned to allow more competition in the taxi trade by allowing private cars (akin to our minicabs) to compete openly and foursquare with regular taxis. But the taxi drivers objected. Surprise, surprise. And thousands of taxis blocked the Paris traffic. The result? The government has watered down its ideas. Private cars will now have to wait 15 minutes from receiving a call to being able to pick someone up. Plus ça change and all that.

Furthermore, President Hollande is not exactly in a strong position politically, with his approval ratings at an all-time low. Meanwhile, May’s European elections may well produce a victory for Marine Le Pen’s Front National. Interestingly, this would not increase pressure for market-friendly reforms, but rather the reverse.

Nothing better illustrates the differences between Britain and France. We all know that here in Britain, UKIP is also likely to do well in the May elections. But although the Front National and UKIP are agreed about the euro and the EU, they are diametrically opposed on the economy. Whereas Nigel Farage and UKIP are old-style Thatcherite Tories, Madame Le Pen wants more of the state and less of the market. What she sees as wrong with the euro and the EU is that they limit the power of the French state to repress and control market forces!

The truth of the matter is that when a country goes as far off-beam as France has done, it takes a long time and a hard struggle to put things right.

I have written before that France has led a charmed life, with its hugely excessive state and over-regulated labour market not having had quite the dire consequences that you might readily think that they would. So far.

My preferred explanation for this has been that in economics time lags can be very long. But eventually les poulets would come home to roost. I think this is now happening.

The French government may be beginning to realise that it has got major problems, and it may even be beginning to realise that state spending and excessive regulation are the key elements.

But that is still a long way from doing something serious about it. And even serious action, when it comes, only delivers real results some years into the future. Mrs Thatcher was first elected in 1979 but her policies only bore fruit in the late 1980s. And even then, the Thatcher/Lawson boom soon gave way to the European Exchange Rate Mechanism (ERM) recession. It was only much later that it became clear that the British economy had been transformed.

To achieve the much-needed improvements in the British economy took both vision and determination from Mrs Thatcher. All the signs are that François Hollande is no Margaret Thatcher – in either respect.

Roger Bootle is managing director of Capital Economics

roger.bootle@capitaleconomics.com

"Too long to read doesn't compute can't accept reality". Comrades

If it isn't on a Labour crib sheet or the Guardian it isn't true.

I sometimes wonder whether to be so gormless wouldn't be a release. It certainly would have been under the 13 years of Labour when we built up the largest debts this country has ever had in monetary and real terms.

the problem Clarkson is you bind at lot of things together and say oh look this is the cause. but they are separate things and it is not as black and white (or left and right) as you try and make it sound.

All of Europe is Rightfully fucked right now and quite frankly it deserves it, with the exception of Germany, it has been Resting on it Laurels for far too long. It's been Almost 40 years since London was the Cultural Hub of the English speaking world yet it is still acting like it is the centre. What were the most advanced Industrial factories in WW2 and still the same, while everyone else has made new bigger, better, more efficient ones. It's like Europe is in a time warp to the mid 20th century.

Just like the pain a lot of the Asian nations have and are still going through to industrialise and modernise, Europe has gotten itself in the same position you don't need to just take steps, as you are now leaps behind.

Personally I cannot see a way the UK can Advance long term (30 year outlook) without quite a bit of Reform, which will create 'suffering' for some. If managed well you could be out the other side of it in less than 10 years.
Japan and South Korea are really good case studies in the 'tiger economy' principles and methodology. Which I suggest need to be applied in many of the old world European powers.

Your point isquite fair bu it is true that France has tried the Socialist solution of tax and spend which has had disastrous consequqnces.


France today is where the UK was in the seventies. Extremely powerful Trade unions that strike if there is a Y in the day and a penchant for overregulation high pulic spending and crippling taxation.

I truly feel that the UK will rapidly overtake them now Hollande has done this last trenche of damage.

I have nothing but respect for the hard working Germans who will become true ally of the UK because it is sick of overspending govts in other countries.

Like it or not the age of the big state has passed we shall have to return to looking after each other rather than thinking the state will do it.

People more inclined to bone idleness will have to change no one but a few Jeremy Kylers on here want to protect them.