Sunday, August 31, 2014
French lessons in how not to run an economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Britain and France are two nations separated by just 21 miles of sea but sharply divided by their economic performance. France, economically stagnant, is experiencing rising unemployment and disagreements over policy which last week forced a serious cabinet shake-up.

Britain, in contrast, is growing well, unemployment is tumbling and, against the predictions of many when the coalition government was formed more than four years ago, has kept policy disagreements to a minimum.

This is not a “what I did on my holidays” piece. I did not contribute to the roughly 9m annual visits by Britons to France this year. But what is happening in France is interesting, and in some respects a warning; it could have happened to Britain.

The French economy did not grow in 2012, managed just 0.2% in 2013, and has growth by just 0.1% in the past 12 months, with little better in prospect for the rest of the year. That is what you really do call flatlining.

Britain did not grow much in 2012, 0.3%, but picked up to 1.7% in 2013 and has grown by 3.2% in the past 12 months.

Britain’s unemployment rate has dropped to 6.4%, a fall of 437,000 in the past 12 months to just over 2m. French unemployment, by contrast, is 10.2% of the workforce, has risen for 36 months in a row and stands at more than 3.4m. Business and consumer confidence in Britain is strong; in France it is weak.

France’s problems go deep. It suffered a milder recession in the crisis than Britain and, with a smaller financial sector and budget deficit, initially recovered more quickly. But that soon faded and the government’s efforts to foster stronger growth with economic reforms look doomed to disappoint.

Fitch, the ratings agency, published an assessment following President Francois Hollande’s dismissal of ministers opposed to his economic programme and appointment of a new cabinet.

“The impact of recent reforms is unclear but in our view they do not look sufficient to reverse the decline in long-term growth and competitiveness,” it said. “We think estimates of long-term growth potential around 1.5% are plausible. A weak labour market will constrain private consumption, while an uncertain economic outlook and low profit margins will subdue business investment.”

Britain has three big advantages over France. Reforms of the kind the French government is trying to introduce were implemented in Britain 30 years ago, though France’s are more timid. France’s supply-side reforms are not only late but there is little political support for them and they are being introduced against the backdrop of a stagnant economy.

Indeed, there was an echo in last week’s French cabinet shake-up, and the removal of anti-reform ministers, of the wet-dry battles in Margaret Thatcher’s early years. She got rid of most of the “wets” and stuck to it. You would not want to bet on Hollande doing the same.

The second factor is the euro. Britain, very sensibly, stayed out of the euro. Though euro membership has not been as big a constraint on France as it has been for the eurozone’s peripheral economies, it inevitably limits the government’s room for manoeuvre. France, like other eurozone countries, is finding life tough in a German-dominated currency union and, with an inflation rate of just 0.6%, is flirting with deflation.

Most importantly of all, France’s problems show the danger of policy lurches, even if they are in a sensible direction. Hollande was elected on a ticket of defying austerity, hitting the financial services industry hard and soak-the-rich tax policies. Ed Miliband, the Labour leader, should be embarrassed by his open admiration for the French president’s then programme.

Hollande has now moved to a programme of spending cuts to pay for tax reductions alongside measures to reduce the costs of doing business and employing people, as set out in a major speech in January. Any sinner who repents is to be welcomed but the effect is to breed uncertainty.

Britain’s coalition government, in contrast, has mainly stuck to what it said it would do on the economy. Policy certainty breeds confidence. The policy has been steady deficit reduction policies alongside loose monetary policy. This is not always well understood by those who should know better; I was astonished to hear John Longworth, director-general of the British Chambers of Commerce, say on the radio the other day that there has been no austerity in Britain.

How much should we worry about what is happening in France and the rest of the eurozone? Can Britain carry on growing while there is stagnation so close to home?

From the middle of 2011 to the spring of 2013, when the eurozone’s double-dip recession coincided with fears of imminent euro break-up, Britain was significantly affected. Falling demand for Britain’s exports and, more importantly, the confidence effects of a eurozone apparently on the brink hampered growth.

The eurozone overall is not quite as weak as France but is weaker than is comfortable to support Britain’s recovery. In the latest 12 months the eurozone has grown by just 0.7%. It needs to be rather stronger, and the European Central Bank will almost certainly need its version of quantitative easing to bring that about and head off the danger of system-wide deflation.

We should not, however, expect strong growth in the eurozone, or in France, any time soon. A couple of weeks ago I pulled out some figures for growth in Italy, Germany and France since the launch of the euro in 1999; all of them much weaker than Britain.

The same is true of the eurozone as a whole. Its economy has risen by 18% in real terms since 1999, compared with 30% for Britain. Britain can grow at a decent pace when the eurozone is merely growing weakly. Achieving good and sustained growth in Britain when the eurozone is stagnating, as exemplified by the problems in France, is possible. But it is more of a challenge.