THE threat of the euro’s collapse has abated for the moment, but
putting the single currency right will involve years of pain. The
pressure for reform and budget cuts is fiercest in Greece, Portugal,
Spain and Italy, which all saw mass strikes and clashes with police this
week (see article). But ahead looms a bigger problem that could dwarf any of these: France.
The country has always been at the heart of the euro, as of the
European Union. President François Mitterrand argued for the single
currency because he hoped to bolster French influence in an EU that
would otherwise fall under the sway of a unified Germany. France has
gained from the euro: it is borrowing at record low rates and has
avoided the troubles of the Mediterranean. Yet even before May, when
François Hollande became the country’s first Socialist president since
Mitterrand, France had ceded leadership in the euro crisis to Germany.
And now its economy looks increasingly vulnerable as well.
As our special report
in this issue explains, France still has many strengths, but its
weaknesses have been laid bare by the euro crisis. For years it has been
losing competitiveness to Germany and the trend has accelerated as the
Germans have cut costs and pushed through big reforms. Without the
option of currency devaluation, France has resorted to public spending
and debt. Even as other EU countries have curbed the reach of the state,
it has grown in France to consume almost 57% of GDP, the highest share
in the euro zone. Because of the failure to balance a single budget
since 1981, public debt has risen from 22% of GDP then to over 90% now.
The business climate in France has also worsened. French firms are
burdened by overly rigid labour- and product-market regulation,
exceptionally high taxes and the euro zone’s heaviest social charges on
payrolls. Not surprisingly, new companies are rare. France has fewer
small and medium-sized enterprises, today’s engines of job growth, than
Germany, Italy or Britain. The economy is stagnant, may tip into
recession this quarter and will barely grow next year. Over 10% of the
workforce, and over 25% of the young, are jobless. The external
current-account deficit has swung from a small surplus in 1999 into one
of the euro zone’s biggest deficits. In short, too many of France’s
firms are uncompetitive and the country’s bloated government is living
beyond its means.
Hollande at bay
With enough boldness and grit, Mr Hollande could now reform France.
His party holds power in the legislature and in almost all the regions.
The left should be better able than the right to persuade the unions to
accept change. Mr Hollande has acknowledged that France lacks
competitiveness. And, encouragingly, he has recently promised to
implement many of the changes recommended in a new report by Louis
Gallois, a businessman, including reducing the burden of social charges
on companies. The president wants to make the labour market more
flexible. This week he even talked of the excessive size of the state,
promising to “do better, while spending less”.
Yet set against the gravity of France’s economic problems, Mr
Hollande still seems half-hearted. Why should business believe him when
he has already pushed through a string of leftish measures, including a
75% top income-tax rate, increased taxes on companies, wealth, capital
gains and dividends, a higher minimum wage and a partial rollback of a
previously accepted rise in the pension age? No wonder so many would-be
entrepreneurs are talking of leaving the country.
|Explore our interactive guide to Europe’s troubled economies|
European governments that have undertaken big reforms have done so
because there was a deep sense of crisis, because voters believed there
was no alternative and because political leaders had the conviction that
change was unavoidable. None of this describes Mr Hollande or France.
During the election campaign, Mr Hollande barely mentioned the need for
business-friendly reform, focusing instead on ending austerity. His
Socialist Party remains unmodernised and hostile to capitalism: since he
began to warn about France’s competitiveness, his approval rating has
plunged. Worse, France is aiming at a moving target. All euro-zone
countries are making structural reforms, and mostly faster and more
extensively than France is doing (see article). The IMF recently warned that France risks being left behind by Italy and Spain.
At stake is not just the future of France, but that of the euro. Mr
Hollande has correctly badgered Angela Merkel for pushing austerity too
hard. But he has hidden behind his napkin when it comes to the political
integration needed to solve the euro crisis. There has to be greater
European-level control over national economic policies. France has
reluctantly ratified the recent fiscal compact, which gives Brussels
extra budgetary powers. But neither the elite nor the voters are yet
prepared to transfer more sovereignty, just as they are unprepared for
deep structural reforms. While most countries discuss how much
sovereignty they will have to give up, France is resolutely avoiding any
debate on the future of Europe. Mr Hollande was badly burned in 2005
when voters rejected the EU constitutional treaty after his party split
down the middle. A repeat of that would pitch the single currency into
Too big not to succeed?
Our most recent special report
on a big European country (in June 2011) focused on Italy’s failure to
reform under Silvio Berlusconi; by the end of the year he was out—and
change had begun. So far investors have been indulgent of France;
indeed, long-term interest rates have fallen a bit. But sooner or later
the centime will drop. You cannot defy economics for long.
Unless Mr Hollande shows that he is genuinely committed to changing
the path his country has been on for the past 30 years, France will lose
the faith of investors—and of Germany. As several euro-zone countries
have found, sentiment in the markets can shift quickly. The crisis could
hit as early as next year. Previous European currency upheavals have
often started elsewhere only to finish by engulfing France—and this
time, too, France rather than Italy or Spain could be where the euro’s
fate is decided. Mr Hollande does not have long to defuse the time-bomb
at the heart of Europe.
Economist, Τετάρτη, 7 Νοεμβρίου 2012 (The time-bomb at the heart of Europe)