Investing in France is not a good proposition at this time. The French economy at 2 trillion in GDP is the euro zone’s second largest economy but a poor place for prospective investors. It has become the new “sick man of Europe”. The economy of France has according to a British cabinet minister been “run into the sand”.
France fell into recession in the last quarter of 2012 and first quarter of 2013. By April 2013 a record number of job seekers were registered. It was the 24th consecutive month of rising unemployment. By June the IMF (International Monetary Fund) was expecting French GDP to contract by 0.2 % from a previous estimate of 0.1 %. Growth forecasts for 2014 have been reduced from 0.9 % to 0.8 %. Although the prediction was that growth would recover in the second half of 2013 this would be due to an improvement in the external environment.
Better than expected industrial output in April and May of this past year lead the beleaguered French government to announce that “recovery” had arrived. The figures for June however once again, showed signs of major weakness. The recession was over but output and consumer spending seemed basically to have flat-lined. Business investment was also in decline.
This is the opposite of what is occurring in Germany where industrial output increased in June at its fastest pace in 2 years. Second quarter growth in Germany was expected to be at least 1%.
Growth prospects in the Euro zone continue to be uncertain in many areas. So much will depend on the French themselves. The continuing uncertainty of tax and business policies are a hindrance to the creation of jobs and economic growth.
Facing a decline in productivity, French firms have still allowed real wage growth but it comes at the price of shrinking profit margins. This condemns companies operating in France to low investment in research and innovation. It has also lead to a large increase in business foreclosures and bankruptcies. This makes the remaining companies even less likely to be competitive in the international arena. The French economy at present is still smaller than it was before the 2008 global financial crisis.
Traditionally France has been able to rely on first rate global companies and a strong ability to design new products through research and development. Infrastructure, a well educated and skilled workforce, as well as a high household savings rate made the French major contenders in the international market.
As recently as July of 2013 the French government held to its prediction that the economy in France would grow by 1.2% in 2014. Finally in August the Finance Minister has acknowledged that growth next year will be much slower. It is now predicting rates more in line with IMF forecasts. They have also reduced the prognosis for expected growth in the second half of 2013 to 0.1%. The French economy has not grown more than 0.2% in any quarter since 2011.
To make matters worse unemployment in France seems to be stuck above 10% and youthful unemployment is at least double that. For the private sector to create jobs there must be growth above 1% which is not happening in France on an annual basis. The promise of the Socialist government to reduce this high rate by the end of 2013 has so far been largely unfulfilled.
The budget deficit had widened by June of 2013 despite tax increases that were made to combat the growing crisis of higher government spending. Only limited growth can be expected from the all important export market because demand from trading partners will be lower. Future demand in the years 2013-2107 is forecast to be close to 5.5% a year in contrast to the 7.2% that had been the norm before the arrival of the crisis in Europe.
The French government continues to cling to the hope that domestic consumer spending alone will yet save the economy from further decline. This has not fully materialized despite very low interest rates for businesses and individuals alike.
In France there has been a shift in policy toward less fiscal austerity and more public investment. This is what French voters decided with the election of Francois Hollande in 2012. This was the first time in over 20 years that a Socialist was back in power. The last election of a Socialist President was in 1981 with the victory of Francois Mitterrand. Hollande upon his election insisted that austerity was no longer inevitable and Germany was being unreasonable to insist upon it.
The incumbent Conservative French President Nicolas Sarkozy became the 11th European leader in the spring of 2012 to fall from power since the European crisis began in 2008. The election results were the worst for the French Right in over 30 years. The Socialist plan called for a 75 percent tax on millionaires, 60,000 more state education jobs and a reworking of pension reform.
The tax on the wealthy and more jobs in the public sector was to return the French economy to growth. That was over almost 2 years ago.
In the summer of 2013 the French President despite declining approval ratings had no alternative but to cut welfare and pension costs. Public social spending stands at 32% of GDP more than any other developed country. Total government spending now stands at 56% of the national income, the second biggest share in the Eurozone. By comparison it is less than 20% in the United States. Even in progressive Sweden the rate of spending is below 30%. The rich country average is in the low 20’s percentile of GDP for such costs.
The last time Socialists were in power in France they cut the retirement age from 65 to 60. Former President Sarkozy raised in back to 62. Promises to reverse that under the new administration have not come to fruition as of yet. Still Paris metro workers for example can still retire at 50. This is not due to increase to 52 until 2017.
Expanded health care coverage introduced under the previous Socialist government has now become cost prohibitive as well. At present, funds for pensions, unemployment and family benefits are all in the red. The resulting deficit, in the billions of Euros is rising rapidly.
So far the government of France has put off the hard spending choices. Tax increases were made to deal with these fiscal problems. These revenue “enhancements” have not been nearly enough. The French government has already postponed for 2 years the commitment to reduce the public deficit to 3%. The European Commission has continued to insist that France must deal with these funding issues.
How will the new Socialist government of France deal with these issues? Up to this point they have not. Tweaking the system around the edges will not bring relief. Further tax hikes will prove to be counter productive.
The wealthiest members of French society will flee the country as many have already done so. The departure from France of the actor Depardieu although high profile, is not an isolated case by any means.
Neither is the skyrocketing demand of property in London by French nationals.Up to 400,000 French nationals now live in London making it the equivalent of France’s 6th largest city. The rush of financiers to leave France and migrate to Britain has turned into a deluge.
These may be unintended consequences but are surely examples of the limits that individuals will express upon ever escalating government monetary requests of citizens. Further revenue demands and regulations of businesses will also prove to be self defeating. The idea of transferring unsustainable social costs to the private sector in France will only slow the barely sustaining French economy further.
The supposed return to growth in the second quarter of 2013 although modest cannot be sustained indefinitely without a return to higher business and investment profitability. The most recent data, for the third quarter may actually indicate that the French economy is shrinking again.
Unemployment has climbed to a 15 year high (11.1% in December of 2013). There are now 3.3 million people out of work.
Business investment continues to fall each and every quarter since Mr. Hollande became president. The dilemma for the President is to move the economy out of the recession that was caused by debt and reconcile that with a promise of more government spending.
Ever higher government spending and borrowing cannot possibly return France to a long term sustained prosperity.
In 2012 and 2013 alone taxes have been raised to 27 billion Euros (36.1 billion U.S.). The new government has only been in office for 21 months. Plans to slow down the spending have come up short. They were just half of the increase in planned revenue. In 2014, 6 billion Euros in new taxes have already been planned.
Although further spending cuts are scheduled as well the ever higher tax rate will be problematic for new business expansion and development.
The French government has attempted to offer French business a deal for 2014. Public spending will be cut somewhat and social costs born by business will also be cut by 30 billion Euros. Businesses for their end of the bargain will need to expand their workforce, guarantee decent wages and provide better training. The dilemma here is just as the French government promises to cut red tape at the same time it is creating new ones.
Internationally the situation is no better. The IMF for example has urged the government of France to cancel plans for higher taxation this year. The consensus here being that higher taxes will not encourage investment at home and certainly not from abroad.
Consumers who make up more than half of the GDP of France cannot keep the recovery going long term in the absence of a turnaround in the business sector. An expanding number of French businesses are continuing to cut investments; by 4% this past year alone. They feel compelled to do so since profit margins are continuing to decline.
Elections as always have consequences. France will not become a good place for investment until the government and more importantly the French people recognize that much of what was promised and now expected is unaffordable. The continued high unemployment and unsustainable pension costs can not be solved with ever higher taxes.
Taxes are already higher than other major European countries. They are heading for 50% and more are in the pipeline. The return to some form of austerity although unpopular may well be the only alternative.
In the long run France must enact policies that encourage more business and investment. This will bring a return to growth which is the only way to continue to afford the high costs of French society in its modern form. This is the only way to ensure future prosperity.
In the meantime investors unlike tourists, need to stay clear of the place.