French downgrade wasn’t unexpected
MOODY’S downgrade of France this week was hardly a surprise. Although blamed on the risk of Greece leaving the Eurozone, France’s structural challenges – its declining competitiveness, high unemployment, public debt and market rigidity – have long been worsening.
The Eurozone crisis has only highlighted a more gradual decline in the country’s ability to compete internationally. France’s current account has deteriorated since 2000 – from a surplus of almost 3 per cent of GDP in 2000 to a deficit of 2 per cent in 2012. And even when many peripheral European countries improved their trade balance sharply after 2007, France’s has worsened.
The country’s rigid and complex regulatory and fiscal environment has done little to fix this. According to a recent study by the IFRAP Foundation, a French company is now subjected to 153 different direct or indirect taxes and levies, compared to only 55 in Germany.
And worse, France’s politicians have failed to make the difficult decisions needed to resolve the situation. Francois Hollande’s government (like that of his predecessor, Nicolas Sarkozy) has been reluctant to carry out vital labour market reforms. Opening up closed professions, reducing high taxation of labour and introducing some flexibility into the market have all been avoided. In his imposition of punitive wealth taxes, Hollande has in some ways made France’s situation worse.
Although market reaction to Moody’s downgrade has been muted, previous instances suggest that such inaction is dangerous. It took 10 years for Finland to regain its AAA/Aaa rating, while Sweden struggled for 11, Denmark for 15 and Australia for 17 years. And they were only able to do so by implementing serious structural reforms, adopting heavy-handed pension changes, across-the-board cuts to social benefits and reduced capital spending.
There is no shortage of advice. Louis Gallois, former chief executive of EADS, recently argued that the French economy is in need of a “competitiveness shock”. He proposed a €30bn (£24.1bn) reduction in the social charges paid by corporations in order to improve France’s international competitiveness. While Hollande has since unveiled a €10bn tax credit for companies in 2013, with a further €5bn promised in the next two years, the government is still displaying none of the required urgency.
The sad truth is that the French people are not yet prepared for difficult decisions. This rating downgrade could present the government with a good opportunity to really push through difficult decisions. But only if it chooses to do so.
Yannick Naud is a portfolio manager at Glendevon King Asset Management and a former parliamentary candidate for the Mouvement Democratique (MoDem) party.