Sunday, April 30, 2017
Vive La France - and an economy that's finally on the up
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.

It is not something I recall every saying before, but sometimes other countries’ elections are more interesting than our own. Theresa May’s regal progress towards endorsement by voters of what the Tories keep calling her “strong and stable” leadership seems unlikely to set the pulse rating.

When the most interesting question about the election is how badly the Labour party will do, and when many long-serving MPs have decided that their time is up, mainly Labour but also long-serving Tories such as the Treasury committee chairman Andrew Tyrie, this is no cliffhanger.

Across the channel in France, however, it really is interesting. Though Emmanuel Macron, a political ingénue, is clear favourite to beat Marine Le Pen, who was National Front leader but has temporarily stepped aside from that role, there is much more uncertainty about that outcome than there is about a May victory.

The uncertainty, meanwhile, will not end there. French parliamentary elections, on June 11 and 18, will come after Britain’s June 8 election. The starting point for them is that Macron’s En Marche! movement has no parliamentary representation and the National Front has only two out of 577 National Assembly members.

The conventional view is that, apart from these political hurdles, the next French president will face an uphill struggle in transforming a sclerotic, high-unemployment French economy into something competitive. Le Pen would try to do so via immigration and protectionism, probably pull out of the euro and replace it with the franc and offer French voters a referendum on Frexit. Good luck with that.

Macron, the more likely winner, though with health warnings attached, would relax labour laws, reduce business taxes, reform a system which he says preserves high unemployment and reduce the size of the public sector. In most respects his policies are a paler version of those of the failed conservative candidate Francois Fillon. He would also embrace closer European integration. Good luck with that too.

France does indeed need reforms but its economy is far from the basket case that it is often portrayed as in Britain. Economic growth, according to the purchasing managers’ index, which measures business-to-business activity, is at its strongest for six years.

Having suffered a big recession in the financial crisis, in line with every advanced economy, France suffered again, and badly, in the eurozone crisis and recession of 2011-13, treading water afterwards. In recent months, however, the French economy appears to have put both of those events behind it and enjoyed a growth spurt.

Figures on Thursday for eurozone economic sentiment, derived from measures of both business and consumer confidence, confirmed the improvement in France. After years in which the eurozone has been kept on life support by the European Central Bank, France has become one of the brightest, and perhaps unlikeliest, stars of its revival.

The “basket case” view of France, and her supposed economic inferiority in comparison with Britain, runs up against the reality of some of the numbers. France is Britain’s third largest export market but consistently runs a significant trade surplus with Britain, of around £6bn a year in recent years.

France in many respects has a better balanced economy and is less reliant on consumer spending, which accounts for around 55% of GDP, compared with 65% in Britain, with larger contributions to GDP from investment, net exports and, of course, a larger state.

French productivity, measured by gross domestic product per hour worked, is higher than in Britain to an almost embarrassing extent. Figures published by the Office for National Statistics earlier this month showed that productivity in France is 29.4% higher than in Britain.

Now I have always argued that this is because Britain is a higher employment, lower-investment economy than France, where restrictive labour laws discourage employment and, where it is an alternative, encourage firms to invest. While a machine gets on with it, a French worker responds with a Gallic shrug. But that French worker has significantly more capital equipment at his or her disposal than their British equivalent.

I still think that is the essential part of the story but it is not the only part of the story. A businessman I met a few days ago, who operates plants in Britain and France, told me that if he wanted something done quickly and well, he would look to his French workers, who are more efficient. I am not suggesting for a second that this is typical. Even the 35-hour week, hated by most businesses, may have the effect of making workers more productive in the hours they are employed.

I am not going to go overboard on this. We would not have just had the first round of the presidential election that we did, in which all the mainstream political parties were wiped out, if there was not widespread discontent in France. Much of that discontent arises from the state of the economy.

Though unemployment has started to edge lower, it is still 10% of the workforce, more than double Britain’s 4.7% rate. Unemployment among the under-25s is scarily high, at nearly 24%, almost twice the UK rate.

The employment rate, the proportion of 16-64 year-olds in work, is at just over 64% roughly 10 percentage points lower in France compared with Britain. Though there is no automatic trade-off, French society would benefit if some of its high productivity were traded for higher employment.

Britain still has a slightly larger economy than France, though these days it is very close, and dependent on small movements in the euro-sterling exchange rate. There have been times in recent months when the pound has been low enough to push French GDP above Britain’s.

France perhaps tells us, more than anything, that you can throw a lot of bad policy at an economy and do less damage than you might expect. France has had more of its share of bad policy in recent years but continues to have a lot of strengths. The French state is far too large and the labour market is tied up in too much red tape.

The Macron reforms have been criticised for not being radical enough. But they are a step in the right direction and he has been smart enough to recognise that if you spell out too many of your intentions, which will create some losers, you diminish your chances of election. Margaret Thatcher recognised that in 1979, with a manifesto which was far less radical than she turned out to be.
We will know next Sunday whether Macron has judged it correctly, and we will know in a few weeks whether the parliamentary elections have produced an outcome he can work with.

One thing, however, is clear. France has been a strong competitor even when held back by misguided policies. With some of the right policies, it could become a much stronger one.

PS A few months ago, 0.3% UK growth in the first quarter would have been regarded as good news. Friday’s figures were, however, widely seen as a disappointment. The economy grew, but at half the rate it averaged in the second half of last year. GDP per head rose by just 0.1%.

Though the figures were a little weaker than expected, the slowdown should not have come as a huge surprise. The rise in inflation, much of it down to the pound’s Brexit fall, has already eaten into the growth in real wages, as described here recently. Retail sales recorded their first fall for four years in the first quarter, and their biggest for seven years. As the Office for National Statistics noted, in describing the GDP figures, “there were falls in several important consumer-focused industries, such as retail sales and accommodation”.

The story of Britain’s economy is quite straightforward. Consumer spending has kept it going since the referendum. When spending slows, as it was bound to given that borrowing and the rundown in savings could only go so far in the face of a squeeze on real incomes, the economy will slow. When the dominant service sector which accounts for four-fifths of GDP slows, as it did from 0.8% to 0.3%, so will the economy. The other parts of the economy -production, construction and agriculture – grew by 0.2%-0.3%. Manufacturing was a bright spot, up 0.5%, but it is barely an eighth of the size of the service sector.

Weaker consumer sending will dominate the outlook for the next year or so, for entirely predictable reasons. As it is, growth in the first quarter was a lot weaker than the Bank of England thought – its staff expected 0.6% according to the monetary policy committee’s March minutes. So households will be spared higher interest rates for a while longer yet.