HEARD ON THE STREET
October 31, 2012, 10:16 a.m. ET
French Resistance to Real Reform
By RICHARD BARLEY
Francois Hollande may be about to face his biggest challenge.
The French president and his new government have been busy crafting policies aimed at bringing the budget deficit down to 3% of gross domestic product in 2013, from 5.2% in 2011. But France's real problems are structural: declining exports, a lack of competitive industry and some of the highest tax and spending levels in Europe. France lags behind its peers in getting to grips with these underlying problems. Ninety-eight business leaders have called on Mr. Hollande to act.
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Associated Press
France has been undergoing a long relative decline. The country has been steadily losing export market share: In 2011, it accounted for just 13.2% of euro-zone exports to the rest of the world, versus 18.5% in 1999, Société Générale notes.
That is partly a result of costs: French labor costs of €34.20 (about $44) per hour in 2011 were 24% above the euro-area average, according to Eurostat. Youth unemployment at 25.7% shows how high minimum wages may be hindering hiring.
But France also needs to innovate. It has some strong high-tech industries such as aerospace and pharmaceuticals, but also exports a large share of low- and medium-tech products facing strong global competition, the International Monetary Fund notes. Government intervention can make it hard to react to economic and competitive forces: Witness the travails of the car maker Peugeot, UG.FR +1.67% burdened by overcapacity.
The 98 business leaders, under the umbrella of the French Association of Private Enterprises, have called on Mr. Hollande to cut public spending from a record level of 56% of GDP and to reduce the cost of labor by cutting social-security contributions for companies by €30 billion. They say that could be paid for in part by raising the value-added tax rate to 21% from 19.6%, shifting the burden to consumers. Even this would only scrape the surface in terms of boosting competitiveness.
France's finance minister, however, opposes the idea, arguing consumers' purchasing power must be preserved to sustain growth. Unemployment has risen to 10.8%, its highest in more than a decade, and households are more inclined to save than to spend.
The government may yet have to bite the bullet. The association's proposals bear a marked similarity to leaks in the French press about a government-commissioned report on competitiveness due to be published Nov. 5.
So far, there has been no sign of a feared bond-market revolt against Mr. Hollande. Spreads on 10-year French debt relative to German bunds have tightened by nearly one percentage point since late April. Investors have been reassured by the commitment to budget targets. But fixing the deficit alone won't help France deal with its long-term problems.
The French president and his new government have been busy crafting policies aimed at bringing the budget deficit down to 3% of gross domestic product in 2013, from 5.2% in 2011. But France's real problems are structural: declining exports, a lack of competitive industry and some of the highest tax and spending levels in Europe. France lags behind its peers in getting to grips with these underlying problems. Ninety-eight business leaders have called on Mr. Hollande to act.
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France's President Francois Hollande speaks at OECD headquarters in Paris on Monday.
France has been undergoing a long relative decline. The country has been steadily losing export market share: In 2011, it accounted for just 13.2% of euro-zone exports to the rest of the world, versus 18.5% in 1999, Société Générale notes.
That is partly a result of costs: French labor costs of €34.20 (about $44) per hour in 2011 were 24% above the euro-area average, according to Eurostat. Youth unemployment at 25.7% shows how high minimum wages may be hindering hiring.
But France also needs to innovate. It has some strong high-tech industries such as aerospace and pharmaceuticals, but also exports a large share of low- and medium-tech products facing strong global competition, the International Monetary Fund notes. Government intervention can make it hard to react to economic and competitive forces: Witness the travails of the car maker Peugeot, UG.FR +1.67% burdened by overcapacity.
The 98 business leaders, under the umbrella of the French Association of Private Enterprises, have called on Mr. Hollande to cut public spending from a record level of 56% of GDP and to reduce the cost of labor by cutting social-security contributions for companies by €30 billion. They say that could be paid for in part by raising the value-added tax rate to 21% from 19.6%, shifting the burden to consumers. Even this would only scrape the surface in terms of boosting competitiveness.
France's finance minister, however, opposes the idea, arguing consumers' purchasing power must be preserved to sustain growth. Unemployment has risen to 10.8%, its highest in more than a decade, and households are more inclined to save than to spend.
The government may yet have to bite the bullet. The association's proposals bear a marked similarity to leaks in the French press about a government-commissioned report on competitiveness due to be published Nov. 5.
So far, there has been no sign of a feared bond-market revolt against Mr. Hollande. Spreads on 10-year French debt relative to German bunds have tightened by nearly one percentage point since late April. Investors have been reassured by the commitment to budget targets. But fixing the deficit alone won't help France deal with its long-term problems.
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