I wrote this piece with my friend Jean-Luc Gaffard. It is part of our ongoing thinking on the early steps of the new French administration. But I think it applies beyond France.
The French government faces a double challenge. The short run effects of the euro crisis compound a long-standing problem of competitiveness: from 1997 to 2012, the French market share fell from 5.3% to 3.3% of world exports. France is therefore suffering more than its neighbors, notably Germany, for the current slowdown.
In response to these challenges, François Hollande designed a two-arms strategy. First, he embraced austerity. To reduce public deficit to 3% next year, the French government presented a shocking 36 billion euros budget law for 2013. That will be mostly composed of tax increases. The second arm of the government strategy, a “competitiveness pact”, was, initially, aimed at shifting an important part of the burden of social security (20 billions euros) from firm contributions to the general taxation. Read more
I started by highlighting the French weakness in this particular moment:
- France suffers, like all other eurozone countries, from a protracted period of slow growth; it is the effect of the global crisis, and its vicious evolution into a local sovereign debt crisis.
- This problem is compounded by the structural weakness of France, witnessed by its deteriorating external position in the past 15 years. A loss of competitiveness that contrasts with the increasing strength of Germany.
The commonsensical solution seems therefore to “do like Germany”: structural reforms aimed at lower wages and lower taxes on firms, in order to improve competitiveness (I did not say it, but this of course goes together with a reduced role of the government and a leaner welfare state). Nevertheless, i pointed out that there are a lot of “buts“, that make the solution less commonsensical than it would appear at first sight: Read more