Moody’s, when it stripped France off its AAA rating on Monday, had a laundry list of laments: “sustained loss of competitiveness,” “rigidities of its labor, goods, and service markets,” “deteriorating economic prospects,” uncertainties in the fiscal outlook, reduced ability to resist shocks emanating from the debt crisis….
A reflection of the granular details that have been seeping from every crack in France’s picturesque veneer: relentlessly rising unemployment, declining production and orders, collapsing automobile sales…. Everything seemed to go south. Home sales through August dropped 17%, mortgage originations plummeted 30.5% through September and 45.8% in October. OK, the “zero-rate mortgage,” a taxpayer funded program put in place by President Sarkozy’s conservative government to prop up home sales was drastically limited last November, austérité oblige. Down-payment requirements have jumped, and young buyers without a lot of cash have lost access to the housing market.
You’d think France is in a depression. Even its neighbor Germany is worried. Yet, third quarter GDP edged up by 0.2%, after a decline of 0.1% in the second quarter. Mere stagnation since the second quarter of 2011. What gives?
Spending by France’s central government makes up 56% of GDP. Regional and local governments also spend voluminous amounts on various services, construction projects, art installations, and other essentials. Combined, they make up a much larger portion of the French economy than the 56% of the central government alone.
In addition, the central government owns all or large chunks of important companies, even after nearly two decades of privatization efforts. For example, Renault was privatized in 1996, but the government still owns 15.7%. France Telecom was privatized in 1998, but the government still owns 27% and gets to appoint the CEO. Air France was privatized in 1999, but even after its merger with KLM, the government still owns 18.6% of the group. It still owns 84.4% of EDF, a mega-utility that owns all of France’s 58 active nuclear reactors, and 100% or SNCF, the national railroad with a quarter million employees.
The extent of government ownership determines how these companies react to the ups and downs of the economy. While it’s difficult for Air France to trim its staff, it has done so. But it is next to impossible for EDF or SNCF to do so. Political pressure simply wouldn’t allow it during times of high unemployment. So when the economy goes into a tailspin, these companies don’t react to the same extent that purely private companies do. It’s an old deal in France: they can count on the government for financial support and protection from competitors; in turn, they provide growth.
The bloodletting has been happening in the private sector. But with its relatively small footprint in the economy, its difficulties are not well showcased in GDP numbers, which are dominated by the massive and complex government apparatus and the enterprises it owns. With sufficient borrowing power and political will to run up deficits, that apparatus can essentially dictate economic growth, even if the private sector is struggling for air.
But the government—with an eye on what happened when bond buyers balked, as they did in Greece—is limiting increases in its outlays and is raising taxes. Hence, “austerity.” Well, in some areas. In other areas, it’s trying to solve economic shortcomings by law.
For example, youth unemployment. It now entraps 22% of all young people and over 45% of those without degrees. After exiting the educational system, only 60% find a job within three years; of those without degrees, only 30% do. For those in disadvantaged areas, such as the northern or eastern suburbs of Paris, the situation can border on the hopeless.
So Parliament voted to “create” 150,000 jobs for young people—100,000 in 2013, the rest in 2014. “Jobs of the future,” they’re called. €2.3 billion has been allocated. It has been tried before. It certainly helps some of the young unemployed. It might even start a few careers. But there are drawbacks. Many of these jobs won’t produce an economic benefit and might evaporate when funding dries up. Others might compete with businesses already in that space, putting further pressure on the private sector. Nevertheless, it might be one of the better ways to spend €2.3 billion—given the desperation of the young unemployed, and the social unrest they might cause.
It’s a classic example of French dirigisme, of government intervention in the economy. It benefits a select group of people. And it benefits the government that must show that it’s doing something. But it doesn’t address the underlying structural problems that are suffocating the private sector, and that are pushing it to shed jobs in the first place. The very problem Moody’s was pointing at.