Is France Dying?

"The pivotal issue facing France is leadership. President Hollande’s presidency has been memorable, but for all the wrong reasons."

On September 17th France’s economy minister, Emmanuel Macron, stated, “France is sick. It’s not well. We have to describe the situation as it is.” He was referring to France’s high unemployment, no economic growth for the first half of 2014 and missed fiscal targets. Future prospects do not look better. Indeed, the Socialist administration of President François Hollande is struggling to stay afloat.

France faces considerable internal dissent over policy direction, a sprinkling of scandals, labor unrest, a challenging international environment and widespread public discontent with the nation’s leader.  Yet France is also one of the world’s largest economies, the second largest in the Eurozone and is a key player in global affairs. In many regards, France has reached one of those critical historical crossroads, where the failure to make tough decisions is likely to result in outcomes that are not desired and inject greater uncertainty into the heart of an already troubled Europe.

Five major problems confront France: getting the economy back to sustainable growth; dealing with the alienated who are heavily represented in the country’s Muslim population; the rise of the far right (fueled by poor economic prospects and worries over immigration); redefining France’s role in Europe in light of an economically more competitive Germany; and poor leadership at the top. The economic issues are partially rooted in a heavy reliance on the state. Any meaningful economic reforms must include a prudent downsizing in state expenditures, something that must be observed in context to an aging population and declining competitiveness.

According to the Organization for Economic Cooperation and Development, France has one of the highest levels of state spending to GDP in Europe. This becomes problematic in an economy that is barely growing, which is the French case since 2009.

As manufacturing was downsized in the late 20th century and through the next decade, the state (with support from both the left and right) used social spending, social transfers and comprehensive healthcare programs to cushion the fall of those hurt. To pay for this, taxes were raised and capital markets tapped. Over time this created, as noted by historian Timothy Smith (author of France in Crisis), “an entitled “rentier” middle class, linked to the state either directly or indirectly, which was carried by the “outsiders”, those already unemployed/underemployed, youth, women, immigrants and unskilled workers.” Smith also stressed that dominant societal attitudes ran and continue to run against making changes - there is no consensus that the market should be free to destroy and create jobs; many French do not believe the market to be the root of prosperity; the aging segment of the population is generally protective of their entitlements in the form of retiree pensions, healthcare and social welfare receipts; and it is easier to blame globalization. In this system, few resources were left for private sector job creation and resistance to change is substantial.

The Great Recession (2009) and the ensuing European sovereign debt crisis (2010- 2014) brought France’s economic problems into sharp focus. The rating agencies took away France’s AAA ratings, criticizing what they saw as President Hollande’s ad hoc austerity measures, his government’s heavy reliance on raising already high taxes instead of making significant spending cuts and a buildup in public sector debt. Standard & Poor’s stated in November 2013: “The downgrade reflects our view that the French government’s current approach to budgetary and structural reforms to taxation, as well as to product, services and labor markets, is unlikely to substantially raise France’s medium-term growth prospects.”  Although not stated by the rating agencies, the Hollande government had gained a reputation – even within France – of being strongly anti-business. Conditions have not improved markedly since 2013 downgrades – debt is up (96.6% of GDP as of Q1 2014), the fiscal situation remains messy and job creation remains near nonexistent.

The economic malaise has socio-political consequences, partially reflected in a sizeable alienated minority of French, mainly of North African and sub-Saharan African descent. Many of them live in the banlieues (outlying suburbs), or “sensitive urban zones”, characterized by high unemployment (usually well above the national average), people living below the poverty line in subsidized housing, facing poor educational opportunities and putting up with high levels of crime. The banlieues have also evolved as societies apart from the rest of France, with a population linked by social media to events in the Arab world, including a focus on radical Islam. The riots of 2005, which resulted in a state of emergency in parts of greater Paris, only reinforced the sense of alienation. The annual burning of cars in urban areas at New Year’s has only reinforced the sense of youth unruliness and discontent.

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