The French government has announced a €20bn programme of tax credits for companies to ease costs and boost their competitiveness. The payroll tax breaks, which will cut labour costs by 6% for French firms, will be paid for with extra spending cuts and an increase in VAT. French labour costs are among the eurozone’s highest and have risen by 8% relative to the regional average since 2000. Germany’s have declined by almost 10% since then.
What the commentators said
France’s socialist president François Hollande has called business tax cuts a “gift to the rich”, said Ambrose Evans-Pritchard in The Daily Telegraph. But he has now had to bow to mounting pressure to help shore up France’s dwindling competitiveness and halt the “relentless decline” in France’s eurozone export share. He has embarked on a policy of switching the burden from wealth creation to consumption. Margaret Thatcher pioneered this strategy, “a detail that France’s socialists prefer to keep quiet”.
Hollande has shown “admirable pragmatism”, but this still “falls far short of what the country needs”, said the FT. Tax breaks on wage bills are a start, but the main burden on business is high social security contributions, while France also desperately needs a much more flexible labour market. “If these challenges are not met”, this week’s moves “will be of little lasting relevance”.
It’s crucial that France boosts its growth trajectory because it is looking more and more like a troubled southern country than a solid member of Europe’s core, said Ftadviser.com. Its overall debt pile is already 90% of GDP, the highest of any state not to get a bail-out, except for Belgium. The budget deficit, almost 5% this year, exceeds Italy’s.
It hardly helps matters that France is sliding into recession and the government’s growth targets are “overoptimistic”, added Jennifer McKeown of Capital Economics. The banking system, moreover, is highly exposed to a potential peripheral default. France’s shaky outlook has yet to be factored into its bond prices, said Simon Ward of Henderson. Expect the yield gap between French paper and its Italian counterpart to shrink.