Such regulations not only limit the flexibility and efficiency of French business, they also waste the nation’s labor resources. While mandatory early retirements strain state and private pension plans, they also deny France a pool of trained workers that in other nations still contribute actively to their economies. Government statistics show less than 20 percent of those aged sixty to sixty-four work in France, compared with more than twice that percentage in the United States and elsewhere, even in Europe. France’s shortened workweek denies the economy still more valuable labor talent, while the country’s generous unemployment benefits encourage still more to stay out of active production. Little wonder, then, that in France some 54 percent of the working-age population holds themselves outside the workforce, compared with 42 percent in Germany and 32 percent in the United States. A popular index to combine all these effects shows that France, in terms of people working and the hours each works, uses 47.4 percent of its full potential. In Germany, the figure is 50 percent; in the United States, it is 68.2 percent.
This code further burdens business by interfering with its ability to manage its own production. The expense and difficulties involved in laying off workers, adjusting wages and setting work schedules often convinces French businesses simply to forgo responses to business fluctuations that would otherwise give them a competitive edge. Worse, they prompt French industry to deny itself talent. In order to avoid the potential cost of firing, managers resist hiring despite potential business advantages. Many firms try to sidestep this problem with short-term employment contracts, some only for a period of months, so much so that fully 82 percent of new hires in 2012 involved such contracts. But this management “solution” comes with its own cost. The uncertainties of short-term employment undermine employee effort. The lack of commitment involved also dissuades firms from training. On both counts, the French economy fails to develop the pool of skilled labor that has become the hallmark of developed and modern knowledge-based economies.
Seemingly not content with these anticompetitive measures, the government has also contrived to encumber business with onerous product and production rules. Through licensing, zoning and other administrative barriers in numbers that defy cataloging here, France has discouraged economic activity across a broad front. The Heritage Foundation, taking such regulations into account, characterizes France’s business environment as only “modestly free” in its scoring of countries across the world. Nor is this all. A recent OECD study found France’s regulatory structure to be more restrictive than those of most of the developed economies that constitute the organization’s membership. France’s failings, it noted, occur in almost every major category: economic regulation, product regulation, impositions by local policies, state control of the details of business operations and barriers to entrepreneurship. The best France did was in the area of administrative regulation, and there it only matched the OECD median.
Part of the problem lies in the sheer number of governmental units that have control in France. The country’s smallest governmental unit, the commune, represents only 1,800 people on average. That compares with an EU average of 5,500 people in the smallest unit of government. This arrangement leaves France with thirty-six thousand governing entities, each setting rules and regulations, usually to suit the preferences of local business and labor interests. Thus, local shopkeepers were more successful in France than elsewhere in blocking large-scale retailers. That may have preserved a more attractive, certainly a more quaint, look to French towns and cities, but it also has denied France a trend that has become a major force for employment elsewhere in the world. It was Paris’s cooperation with such local pressure that also blocked Amazon’s effort to introduce online delivery service into the country and that thwarted attempts to allow supermarkets, as well as pharmacies, to sell over-the-counter drugs. The same sorts of interests have also steadfastly blocked efforts to increase the number of taxis in Paris, which to this day remains at the original 1924 quota.
Making matters even worse, the French government, for all the revenue it collects, seems to do less for its citizens than other countries do. The unemployed, though generously provided for, get much less help from the state finding new jobs or needed training. Paris spends only a third as much as Berlin on such direct help. In France, the average government employee assisting the unemployed with retraining and in their job search covers seventy-nine people. That compares with thirty-nine in Germany. Likewise, French schools do not prepare their charges for the job market as well as those of other countries. Recent OECD comparisons of high-school test scores show French students trailing their European and American counterparts in reading and science. The only place where the French students outscored many competitors was in math, and they still trailed the Germans. France, it would seem, is more inclined to warehouse people than help them apply themselves to economic effort.
This entire and varied weight of dysfunction has created a vicious cycle. Taxes, regulations and the loss of labor talent have so eroded profitability in French business that it has neglected its own upkeep. Again, Germany provides a handy counterpoint. During the last three years French industry has installed just over three thousand industrial robots, compared with the twenty thousand installed by German industry. Germany has spent almost 70 percent more on research and development than has France. The 2 percent of its GDP that France spends on technology investments is barely over half of the rate in Germany. This investment shortfall has interacted with France’s waste of labor talent to erode worker productivity so that even though French and German wages have moved up in tandem, the labor cost per unit of output in France has risen by 28 percent over the past ten years, compared with only 8 percent in Germany.
This destructive interaction has not just thwarted growth, but it has also begun France’s deindustrialization. Cost disadvantages have reduced industrial value added from 18 percent of the French economy in 2000 to only 12.5 percent recently, the lowest in the euro zone. French employment in manufacturing has dropped 20 percent since 2000. Meanwhile, the investment and talent shortfall has pushed what remains of the French industry increasingly toward less sophisticated products and processes. While overall manufacturing employment has dropped, employment in firms that produce unsophisticated goods and services has actually risen by 18 percent. The OECD notes that more than one-third of French manufacturing is medium- or low-tech, compared with only about one-quarter in Germany and slightly less than 25 percent in the United States. France, quite simply, is beginning to resemble a less developed economy.
FRANCE PROBABLY would have taken remedial action long ago were it not for the implicit support of the EU, the common currency and Germany. Surely it is not a coincidence that France’s greatest deterioration has occurred in the thirteen years since the adoption of the euro and the formation of the euro zone. The country’s balance of exports over imports, for instance, remained strongly positive through much of the 1990s and only began to slip into deficit in this new century. The decline in the profitability of French business also has become most evident since the inauguration of the euro, as have the slide in France’s share of global and European exports, the deterioration in French productivity and the country’s turn to less sophisticated products and processes. It is not that the currency union caused the problem. Rather, it blunted the pain France would otherwise have felt and so let matters go further than they might have otherwise.
Certainly, the EU’s common agricultural policy (CAP) has helped France otherwise live well despite its economic failings. Under this scheme, the EU budgets substantial funds to sustain food prices and ensure the profitability of agriculture. Because France’s economy has an especially large agricultural sector, the program effectively transfers funds to France from the more industrial members of the union, such as Germany. It is a major flow too. The CAP constitutes about 40 percent of the EU’s budget and is scheduled to rise to some €100 billion over the next five years. The amount that accrues to France varies from year to year, depending on which crops require the greatest price support, but EU figures show that France gets about one-fifth of the total on average, the biggest share by far. The €8 billion that would accrue, according to the EU’s latest long-term budgeting, would alone constitute almost a 0.5 percent injection into France’s economy, and it would return to France a large portion of its entire contribution to the EU budget. It is hardly surprising, then, that Hollande so violently resisted calls by British prime minister David Cameron to cut the EU budget and, by implication, the CAP as well.
The euro has allowed France to continue its competitive failings in a different way. If there were no common currency and France operated under its old franc, the declines in exports and investment flows that would accompany its economy’s competitive losses would quickly have undermined the currency’s value. The falling franc would ultimately have helped French industry compete by reducing the prices of its product in other currencies. It also would have eroded the global purchasing power of French consumers, government and business, imposing a spending discipline throughout the economy. Further, the currency losses would have increased the cost of credit, as lenders, wary of losing still more on the falling franc, would have demanded a higher rate on any loan that paid them in francs. The unavoidable burden of higher credit costs would have constrained government budgets and forced Paris to reconsider the lavish benefits it provides. Meanwhile, the pain emerging from all these strains would surely have created a strong constituency to reform the practices that led to them, one Paris could not easily defy.Image: Pullquote: France uses the union and Germany to punch geopolitically above its economic weight, to live beyond its means, and to carry on with policies and practices that it otherwise could not have sustained.Essay Types: Essay