12 January 2014

Simon Nixon: All of Europe awaits Hollande's cure

Writing for the WSJ, Nixon says that as the crisis countries of southern Europe start to show signs of recovery, the spotlight has swung with remarkable speed onto France, the Continent's second-largest economy.

After three recessions in five years, France's economic weaknesses are becoming harder to ignore: Growth flatlined in the third quarter of 2013, unemployment hit 10.9%, up from 7.8% in 2010, and the current account, which was consistently in surplus before the crisis, is persistently in deficit.

Most economists estimate France's long-term potential nominal GDP growth to be at least 3%, comfortably above current 10-year borrowing costs of 2.5%, while the budget deficit is forecast to fall below 3% in 2016. But France's real problem is that this long-term potential growth rate is far too low given its expanding population and importance to the wider eurozone economy. Most forecasters estimate that France's real potential growth rate—after stripping out inflation—is only around 1.2%. The US and UK are widely thought to be capable of growing at about 3% and 2.2%, respectively. "A growth failure in France would have significant spillovers to its neighbours, particularly small, open economies in the euro area and smaller but still measurable impacts on Italy and Spain", the International Monetary Fund warned last year.

The French government argues it has already done more than is generally recognised to address these challenges... But Mr Hollande himself has acknowledged this isn't enough. In a New Year message, he surprised many with his frank admission of the need to cut spending and taxes and to boost competitiveness. He is expected to provide further details in his speech this week.

There is little doubt what business and investors want to hear. Unit labour costs remain high relative to other major eurozone economies. The tax wedge has been cut for low-income workers, but not for higher wage earners. The labour market is still too inflexible: The World Economic Forum ranks France 144th out of 148 countries for ease of hiring and firing. Eliminating restrictive practices and anticompetitive regulations in the services sector—including areas such as transport, energy and professional services—wouldn't only boost growth in those industries but cut costs for other sectors.

But does Mr Hollande have the strength to deliver such an ambitious agenda? Until now, he has prided himself on achieving consensus behind his reform programme—in Parliament, his party and the country—avoiding what he believes was the self-defeating confrontational approach of his predecessor. The questions now are whether his quest for consensus will limit his ambitions—and what happens if consensus proves elusive.

Full article (WSJ subscription required)

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