Spain and Italy are suffering from “a severe credit crunch and drastic austerity”, says James Fontanella-Khan in the Financial Times, but in France the main problem “appears to be the generalised gloom”.
The economy has just slipped into recession; high unemployment of 11% is further undermining consumption; the government budget hasn’t been in balance for a generation; and the overall debt pile has reached almost 95% of GDP. And there seems little prospect of the economy shaking off its torpor and working down the debt anytime soon.
France has always been considered part of the “northern core” of the eurozone, says Roger Bootle of Capital Economics in The Daily Telegraph. But it’s starting to look “part of the soft southern underbelly”. The long-term decline in its competitiveness, and hence growth potential, can no longer be ignored.
Since the euro was formed in 1999, German unit labour costs have climbed by only 10%; France’s by 30%. And unlike Spain, Greece and Ireland, they haven’t reduced them in the past few years. France’s share of world exports is down 50% from 1999 and it has only created 90,000 jobs in the past two years, compared to 400,000 in Britain.
A key problem for France is the rigid labour market, notes Bootle, with a 35-hour week, social charges of around 50% on top of wages, and employment-protection legislation that “makes it almost impossible to sack anybody”.
President François Hollande has at least managed to pass “a modest loosening” of the labour code, says Steven Erlanger in the International Herald Tribune. A deal between employers and unions will make it easier for firms to demand that workers take pay cuts and shorter hours in a downturn in exchange for job security.
But Hollande has yet to tackle the extremely generous long-term contracts in the labour market, which are the main reason employers are loath to hire, and it’s high time he took the axe to welfare, say employers.
Corporate taxes will have to come down too to spur investment. Reforms should continue, says Guillaume Menuet of Citibank, but given “mounting opposition from the left [of the Socialist government], the pace might slow down considerably”.
Given that the pace of reform already feels like eternity in slow motion, it seems investors will have to develop even greater reserves of patience over the next few years.