France with the second largest economy in Europe, has continued in economic stagnation for four years. There are a number of external factors that weigh heavily on growth for the French economy. However, much of what has been allowed to develop inside the country, is responsible for the dismal economic and investment performance of the nation. As an acknowledgment of the crisis taking hold of the country, President Hollande has now declared a state of economic and social emergency.
The French economy grew 1.1% in 2015. It was a far better performance from the previous three years. The improving conditions were largely the result of lower interest rates and the rapid decline in prices for commodities, particularly those in the energy sector. It was the first time the GDP (Gross Domestic Product) had exceeded 1% since 2011. Growth for 2014 was just 0.2%, following 0.8% in 2013 and 0% in 2012.
Hollande (right) and outgoing President Nicolas Sarkozy at Élysée Palace on inauguration day, 15 May 2012
Rates of investment dropped from 2.1% in 2011 to 0.03% in 2012, the year Hollande assumed office. It then went negative to -0.05% in 2013 and -1.2% in 2014.
These grim rates of economic and investment expansion have resulted in ruinously high unemployment. In 2011, the number of citizens out of a job was 9.2%. By 2012 it had increased to 9.8%. During the following two years it would move even higher to 10.3%. Now in 2016, it has reached a rate of 10.6% and has become a national emergency.
This excessive high rate of joblessness, has become a political liability for the French government considering the 4.2% unemployment in Germany and the 9.8% as a European average. With elections just a little more than a year away, the leadership is becoming increasingly desperate to reverse the trend.
The government of France under Francois Hollande apparently does not believe the old adage about doing the same things, but continuing to expect a different outcome is the height of insanity. After making the pronouncement about the France being in a state of economic and social emergency, he of course advanced the typical socialist solution. Once again, there is to be new government sponsored programs and more spending by his administration.
President Hollande insists that money for the new plan would come from savings in other areas of public spending. Where he will find an additional 2 billion Euros, the equivalent of $2.17 billion USD (United States Dollar) is not as important as the fact that there is a refusal to admit, that the employment issue cannot be solved under present government policy.
Paris capital of France, is the country’s largest urban economy (and the world’s 3rd)
Under the proposed two year legislation, companies with fewer than 250 employees will get extra government subsidies (2000 Euros), if they hire a young or unemployed person for at least six months. There will also be an additional 500,000 slots made available for vocational training.
In an effort to reassure voters, the President insists that the entire scheme can be financed without any new taxes whatsoever. In an annual speech to business leaders, Hollande called on his audience to build the economic and social model for the future.
Once he introduced his new programs for the unemployment issue, he went on to address the issue of labor market adaptability. He insists on stability and predictability for both employers and their workers. He promises greater flexibility for those offering employment, but at the same time wishes to guarantee stability and predictability to employees. The message is somewhat contradictory, but the communication remains the same, nothing is going to really change.
La Défense is the largest business district in Europe
In a free market, companies need to be able to hire and fire based on economic circumstances. These decisions cannot be made by a government desire to provide almost permanent jobs for citizens. It explains the reluctance of French firms in offering more employment opportunities.
Over the years the government has made it increasingly difficult, to discharge excess or nonperforming staff. Therefore, there is an unwillingness among businesses to hire anyone, unless it has become absolutely necessary.
The reality of government interference in hiring and firing, goes far in explaining why unemployment continues to be stubbornly high in France. The announcements of new accords, pacts and plans have done little in combating the rising rate of joblessness throughout the country.
In fact, the President has already assured voters, that the 35 hour work week would be unaffected.
Leaders of Belarus, Russia, Germany, France, and Ukraine at the summit in Minsk, 11–12 February 2015
The Hollande Administration remains long on words and short on achievements. The skepticism is not limited to just the business and commercial community. There has become widespread dissatisfaction in the performance of the French government concerning the economy.
Equating the unemployment issue to the that of the emergency caused by terrorism, only underscores the failure of the present leadership in confronting either issue in an effective manner.
That rising unemployment has become a national crisis, cannot be disputed. In addition to sapping potential growth and wasting the energy of many young and talented individuals, it is increasing the alienation that many feel within the society.
The lack of opportunity for young people in France especially among the Maghreb and African communities, has a direct correlation to the increasing drug trade. It also provides some explanation for the rising extremism in these minority populations. The recent influx of more refugees from the Middle East, will only exacerbate this situation.
Hollande reviews troops during the 2013 Bastille Day military parade
There is little doubt that the twin issues of the economy and terrorism will be on the mind of French voters, as the election of 2017 draws closer. The country has been in an official state of emergency, since the attacks in Paris that took place last November. If there are further acts of violence in either the immigrant community or from foreign extremists, it will bring even further criticism of an increasingly unpopular regime.
A real turn around in the employment picture for France is becoming increasingly unlikely. As the world economy continues to slow down and the positive effects of low energy prices are factored in, there is little that the French government can do to further stimulate growth.
Interest rates are no longer controlled nationally, as part of being in the Euro-zone. Besides there is not much more that can be done in this arena. The rate set by the ECB (European Central Bank) is already at a historic low of -0.3%. Negative rates are also in effect with the nations of Denmark at -0.65%, Sweden at -1.1% and Switzerland 0.75%. Japan has just joined this trend as of last week, lowering their effective rate to -0.1%. A fifth of the the world GDP is now covered by a central bank with negative interest rates.
French export destinations
The ECB has also embarked on a program of buying government bonds to a tune of 1.5 trillion Euros ($1.62 trillion USD) less than a year ago and may well increase the rate of quantitative easing further in March. It is unclear whether a further addition, will much impact on the French economy.
As monetary policy has basically reached the limit of effectiveness, the French government is left with using fiscal stimulus as a growth mechanism. Here again, the past profligacy of the socialist system leaves little room for maneuver.
France as all nations in the Euro-zone, is committed to keeping annual debt spending to no higher than 3% of GDP, minus interest payments on previous debt. The French are already exceeding this limitation with a rate at 4% instead.
France’s public debt. It continues to rise.
Worse yet, overall public debt to GDP has continued to increase under the socialist government of President Hollande. It has gone from 89.6% in 2012, to 95% at the end of last year. Sovereign debt is now at an all time high, which makes higher rates of government spending progressively problematic.
That leaves few alternatives, without embarking on a major restructuring of business rules and regulations. Politically that is a nonstarter for the present regime. So is significant tax cuts to encourage business growth in general. Any reduction in revenues would necessitate a corresponding diminution of government spending. This is in total opposition to the socialist mentality of the role of government.
Therefore the government of France will soldier on, hoping that economic conditions will improve over time. This is becoming increasingly unlikely as the global economy continues to weaken and the threats of domestic terrorism grow alarmingly.