BRUSSELS is becoming more critical of France’s inability to control its public finances. Some ratings agencies downgraded the outlook on France in October 2014 and gloomy perspectives could frighten investors.
French deficits remain untamed, despite very low borrowing rates. Any increase in the cost of borrowing would be catastrophic, writes World Review expert Dr Emmanuel Martin.
The French government had to deploy ingenuity to send a signal that ‘reforms’ are being implemented to reassure both the European Commission in Brussels and the financial markets. And French President Francois Hollande, suffering record lows in popularity for a president in modern times, also had to indicate his government’s plans to French citizens.
But is this mere communication or is there substance to what he says?
France has some 400,000 norms - rules, regulations and directives - which are costly and block economic activity.
The French Ministry of the Economy distinguishes between the direct costs of producing, implementing and monitoring these 'norms' on public finances and the cost to businesses and households. The Organisation for Economic Cooperation and Development (OECD) estimates these administrative burdens are costing between 60 billion to 80 billion euros - three to four per cent of GDP.
The World Economic Forum’s 2014 - 2015 competitiveness report ranks France 121st out of 144 countries for ‘burden of government regulation’ for businesses.
The norms translate into less growth, less wealth-creation and fewer jobs with unemployment breaking records and rising 0.6 per cent to 3.43 million in September 2014.
The French government launched an initiative called the ‘simplification shock’ to cut red tape and simplify the norms and regulations in April 2013.
Another 50 new measures to simplify the regulations for businesses were unveiled by the president on October 30, 2014, after 50 changes had been introduced in the first phase earlier in 2014.
They targeted three major areas - construction, traditionally an important growth sector; employment of apprentices and training; and a host of simplified administrative procedures ranging from tax declaration to e-applications.
The government claims simplification will save 11.4 billion euros in two years, others are sceptical.
The simplification move is counterbalanced by more new rules and directives.
Francois Hollande reached the mid-point of his presidency on November 6 with his popularity plunging to a record low of 13 per cent - half that of right-wing populist leader Marine Le Pen.
Four French citizens and three journalists grilled the president in a special television programme to mark the occasion. But none of them received the direct answers they expected.
New ‘subsidised’ contracts for older unemployed and iPads for schoolchildren were among the president’s recipes. And the substance of his presentation was that France hoped to organise the Olympic Games in Paris in 2024 and the Universal Exhibition in 2025.
Mr Hollande pledged there would be no tax increases for anyone for two and half years, but less than a week later new taxes were imposed on some households and business in a supplementary budget for 2015.
The shallowness of the president’s vision in the television debate echoed the superficiality of the new ‘reforms’. Mr Hollande, and many French, are not mentally equipped to accept real reform while vested interests behind the current complexity of rules and regulations are huge. There is real pessimism about how events will unfold.
European growth is stagnating. Forecast growth in France has been revised down to 0.4 per cent for 2014 and one per cent for 2015. Growth for the third quarter of 2014 relies essentially on government spending.
There is a window of opportunity for orderly reforms, with low borrowing rates partly helped by the European Central Bank’s policies, and more so since ECB President Mario Draghi’s statements on potential Quantitative Easing with sovereign bond purchases by the ECB.
France is also benefiting from a perception that it is too big to fail.
The ECB Quantitative Easing announcement, whatever the markets reaction, remains technically and politically difficult to implement. It is probably another announcement to stretch out the window of opportunity for many countries, especially France. Its effect would amount to postponing the inevitable a bit longer.
France could soon lose its attraction relative to other eurozone countries which are better at introducing reform and handling their primary budget deficits or have better growth prospects. Spain, Germany and Italy offer enhanced prospects on these criteria.
Investor David Einhorn, who famously predicted the fall of Lehman Brothers, says France is more risky than Greece because it is ‘too proud to reform’.
The cost of inaction today is high.
Publication Date:
Fri, 2014-11-21 11:58
