Can François do a Gerhard?

France’s economic woes

The president is talking reform. It is in his interest, and his country’s, that he should carry it outJan 11th 2014 | From the print edition

EUROPE’S weakness has been most evident around its periphery—in Greece, Portugal, Spain and Italy. Yet by some measures, France is in worse shape. Among EU countries in the past 25 years, only Italy has seen slower growth. France’s budget deficit is bigger than Italy’s and its current-account deficit is the largest in the euro zone. But it is the contrast with Germany that is most painful. Since the creation of the euro, in 1999, France’s GDP per head has risen by just 0.8% a year, against Germany’s 1.3%; its unit labour costs, then below Germany’s, are now higher; its exports, then worth almost 60% of Germany’s, now total less than 40%. Unemployment in France is near 11%, a 16-year high; in Germany it is just over 5%, a 20-year low. And whereas most of the euro zone is now growing, France may be entering another recession.

This weakness is undermining efforts to fix the euro. The Franco-German engine that usually powers the EU is broken, and France’s failure to reform is provoking a backlash against efforts—such as the creation of a banking union—needed to shore up the single currency. Why, German taxpayers ask, should their credit support unreformed Gallic practices?

The response to all this from François Hollande, France’s Socialist president since mid-2012, has so far been hapless. His early objections to excessive austerity came to nothing. Rather than cut public spending (at 57% of GDP, the highest in the euro zone), he has raised taxes, including a payroll charge on high earners of 75%. Instead of the proper pension reforms seen elsewhere, he has marginally lengthened the contribution period. Far from copying the deep structural reforms undertaken in peripheral countries, he has barely begun liberalising labour and product markets or trimming France’s social-welfare spending, the highest in the OECD rich-country club.

Such soft-pedalling has got Mr Hollande nowhere. Polls now rank him as the least popular president of the Fifth Republic; many young people are talking of leaving the country. Yet there is now a glimmer of light. In his new-year message, Mr Hollande at last spoke seriously of cutting taxes and public spending, improving competitiveness and creating a more investor-friendly climate. And he offered French business what he called a “responsibility pact” (see article).

Reforming France will require wholesale changes. Taxes are too high and the state is too big. Both need to be scaled back. Then must come greater liberalisation of the labour market, a fuller pension shake-up and deep cuts in social-welfare charges on business.

His last chance

Given his domestic record, voters have every reason to be sceptical that Mr Hollande will live up to his promises. But he has demonstrated some boldness in acting abroad. It is in his own interest to take radical action at home, too.

If Mr Hollande allows the economy to slide, he will spoil his chances of re-election in 2017. He cannot spend his way out of trouble, because France is too heavily in debt, so reform is his only option. He has plenty of time to implement changes before the next election. French presidents have a lot of power, and he is ready to pass reforms by decree, not legislation. The centre-right is in disarray, partly because Marine Le Pen’s Front National is riding high. Although he is unpopular with some in his party, he has little to fear from his left; anyway, the French left often proves more reformist than the right.

Ten years ago Germany was labelled “the sick man of Europe”. Then Gerhard Schröder, a Social Democrat, liberalised radically, and Germany bounced back. So could France now, if only its president were bold enough.