So, is the French economy really in such bad shape? In this note, which accompanies Manuel's excellent posts on the French Presidential elections, I will try to answer just that question. In fact I will argue that France indeed faces important and non-negligible challenges in the immediate future, among them most notably how to better manager the y-o-y and long term evolution of public finances, as well as the need to reform a rather rigid labour market. However, I will also argue that the invocation of
France and the Eurozone – A Laggard?
Much of what recently has been written and said about the relatively poor state of the French economy compared to the other large Eurozone countries comes on the back of 2006 which saw a record year of economic growth in GDP in the Eurozone and indeed the whole of Europe. And clearly looked at in this context
This overview puts in some kind of perspective the rather hasty conclusions being drawn on the basis of what is, after all, only is one year's relative performace, and, as Emmanuel from AFOE points out, this clearly is far from constituting a trend, at least not the way I have been taught in economics it doesn't. Now none of this means that
And the problem is of a somewhat pressing nature. In particular, and despite the fact that I shall talk rather favorably of French demographics below, France, along with other developed economies, is set to age rapidly over the next 20 years as a result of the ongoing demographic transition. This means that the labour market needs to be a well-functioning one so that the supply side of the economy is not constrained as workers become an ever scarcer resource compared to elderly dependents. Especially noteworthy in this context is youth unemployment in
Another aspect where
The first issue to be addressed is, I think, of an institutional nature, since the lingering budget deficit first and foremost tells a tale of a state apparatus where expenses are quite simply badly managed compared to receipts. But in terms of the broader and longer term picture we need to talk about the structural drivers of public debt, and here
More worryingly, as also aptly noted by Eric Chaney (linked above), the window of opportunity for
Now taking up the baton on the demographic situation in
In France fertility rates have rebounded since the middle of the 1990s and are now close to replacement (a situation which has only really be attained by the US among the developed nations), and if we are all busy criticizing French public policy in many areas we might perhaps do well to recognise that pro-natalist policies in France do seem to have had some effect, and this is one thing which certainly seems to have been done well.
This relatively favourable fertility situation by no means saves France from a structural shock to its population pyramid as the effects of the demographic transition ripples across the age cohorts, but it does mean that compared to Italy and Germany where fertility levels stubbornly continue to lingers close to the 1.3/1.4 range the future does look just a little bit brighter for France, with of course the proviso that future trends in net migration represent an unknown in all cases. The key point on fertility however is that although the picture points to an apparent return to 1980 standards so to speak the figure hides the cumulative effect on the size of future generations. As such the size of the various cohorts currently passing through their reproductive ages is smaller than that of the preceding ones, so the absolute numbers of children being born will be commensurately lower (with pension sustainability implications), and again all of this means that the crude figures need to be treated with some caution.
Lastly before I conclude this note I want to dwell a bit on another aspect highlighted by Chaney as part of
By itself, a trade deficit is not a symptom of macro illness (nor is a government budget deficit). Diverging domestic demand growth between countries having similar productivity and cost trends generates temporary surpluses and deficits, with temporary maybe meaning several years. That
Essentially, I think Chaney is spot on in terms of his focus on the structural nature of French export business and most notably the relative lack of innovation when compared with other European countries. Yet there is another subtle point here I think which is ever so important both in a European and global context.
In a world where populations are ageing, and where trade surpluses are ballooning and becoming structurally inbuilt in some of the oldest societies, we logically also need importers to make the global books balance. In fact, as was demonstrated by the figure in my recent piece on global decoupling
Looking into future of
To finish where I started with Eric Chaney's notes over at Morgan Stanley’s GEF (see links above) I do not agree with the overall label of