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Economy

France must face up to reforms

Whether you ask the IMF, OECD, the European Commission or the German government, they're unanimous that France must undertake economic reforms. Is it the next country in the euro zone teetering at the edge?

Rating agency Moody's was the latest to send out a warning. It revoked its top credit rating for France and lowered its forecast to "negative." But the financial markets remained unfazed. "First of all, many countries have lost their triple-A rating. Even the United States no longer has it, and can still refinance itself," said Jörg Krämer, chief economist at Commerzbank. In addition, he noted, the European Central Bank is there to do absolutely everything necessary to keep the euro zone together. "That explains why investors aren't worried," Krämer told Deutsche Welle.

Jörg Krämer, chief economist at Commerzbank
Copyright: Commerzbank AG

Krämer is confident that France won't be the next crisis economy

Until now, France - like Germany - has been one of the winners in the euro-zone crisis, and can borrow money at historically low interest rates. Still, said Claire Demesmay, of the German Council on Foreign Relations, the Moody downgrade is a clear signal "that Francois Hollande has his back up against the wall and has no choice but to bring on reforms in the country."

Avoiding reforms

For the past 20 years, no French government has succeeded in undertaking the structural reforms that would make the country more competitive. On the contrary, the state has borrowed to finance its generous social provisions - climaxing in the introduction of the 35-hour work week twelve years ago. According to the Organization for Economic Cooperation and Development (OECD), France is the European champion for how little workers work. Germans, for example, work an average of 225 hours more each year than the French.

The shortest work week goes hand-in-hand with a rigid employment market. "The minimum wage is nearly 50 percent of the average wage, so it destroys jobs in an extensive way. That, in part, explains the very high unemployment rate in France," said Krämer. Indeed, the country is struggling with an unemployment rate of 11 percent, twice as high as in Germany. One in four French people under the age of 25 is unemployed.

Jobs have been slashed especially in the industrial sector. According to the European Commission, more than 750,000 jobs in the manufacturing industry have been cut over the last ten years. The industrial sector's share in the nation's economic output as a whole has been continually sinking as a result. At 12.5 percent, it is only half as high as in Germany.

Franceenvies Germany's mid-sized companies

Francelooks enviously at German mid-sized businesses known for their innovation and market leadership. Other than a few global corporations, France is home to many small companies with fewer than 50 employees: that's because a crew of over 50 workers means countless more employment regulations, including strict protection against dismissal.

French President Francois Hollande speaking at a press conference in November 13, 2012. 
Copyright: MARTIN BUREAU/AFP/Getty Images)

Hollande wants to protect his people from too much austerity

While the companies are too small, the financial institutes are dangerously large. Total assets of France's largest bank, BNP Paribas, constituted a good 90 percent of the country's gross domestic product at the end of 2011. In addition, it is much more heavily invested in southern European crisis countries than German banks are, making France markedly more vulnerable to financial market turbulence, especially if Greece were to exit the euro zone.

Berlinbeats Paris when it comes to debt as well. While France's debt ratio exceeded 90 percent of economic output, it has dropped in Germany to 80 percent. While the budget deficit in Paris will not fall under 3 percent of the gross domestic product in 2013, the German government might have a chance at a balanced budget.

Other countries more worrisome

Even if France has a tough time competing with Germany, Jörg Krämer refuses to call France the eurozone's next problem child. "France is a source of insecurity, but I think there are bigger problems in Spain, and especially in Italy."

And the country's key data still do justice to the "Grande Nation": France, for instance, had the fourth largest foreign investments in the first half of the year; it is the fifth largest economy and the sixth largest exporting nation in the world.

Dr. Claire Demesmay

Demesmay says reforms have to come

"France still has a strong industry and large companies operating across the globe, and its demographic situation is also advantageous for the economy," Claire Demesmay noted. In addition, its reliance on nuclear power means that energy costs are lower in France than in other European countries.

Doing something right?

French President Hollande has prompted incomprehension abroad with his taxing of millionaires at 75 percent and reducing the age of retirement from 62 to 60 since taking office six months ago. "But one has to keep in mind that the tax lapses after two years, and that less than 20 percent of those up for retirement at 60 can actually become retirees," Francois Villeroy de Galhau, managing director of BNP Paribas, said in the German business daily Handelsblatt.

Hollande has recognized the problems of the country and has already introduced initial measures, attested Demesmay. "His approach is to go down this course without snubbing the French population," she observed. That means that he will take more time in implementing the reforms than his predecessor Nicolas Sarkozy did. "He's betting that the financial markets will remain calm and the interest rates low for France," she said. It could just be a risky bet.

DW.DE