The French economy: what’s really at stake?


At the time of writing, it is not yet clear whether the Commission will reject the draft budgetary plan presented by the French Government in mid-October. What’s clear is that France’s public deficit won’t be below 3% this year and the next. Projections foresee 4.4% deficit this year and 4.3% in 2015. The French Government said the weak economic outlook justifies the deficit.

However, a breach of the deficit rules seems a rather minor crime compared to the level of attention France has attracted over recent months from media and EU policy makers.

To some, such France-bashing seems unjustified.

After all the country navigated relatively well through the post-2008 storm: unemployment is at 10.3% (below the EA average 11.5%), GDP growth suffered relatively less severely than the EA average the 2008 blow, and subsequently resumed a slow yet positive trend.

Source: Eurostat

In one respect, though, France is out of sync with the rest of the Eurozone: its balance of payments. France has run for several years a persistent trade deficit, while the rest of the Eurozone since 2008 has largely moved to a surplus. Furthermore France is the last big Eurozone country still importing more than it exports. This negative external position translated into an increasing net external debt, from 19% of GDP in 2008 to 35% in 2012. This implies that, for France’s GDP to grow, positive domestic demand sustained also through public deficits was necessary to offset the negative sign of the trade balance.

From the point of view of France, this pattern is, in the long run, unsustainable since a country can accumulate trade deficits only for as long as foreign lenders are willing to take the other side of the bet. However from the point of view of the Eurozone, things are different. Since EA Member States are deeply integrated, any action from one of them has consequences on the others. Therefore, should France undertake deep budget cuts or any other measure to reduce its imports, the consequential effect would be a reduction in exports of its neighbouring countries, many of which have France as their prime export destination. Needless to say, this would have negative impacts on their economic growth.

One lesson to be learnt from the Eurozone response to the crisis is that when many deeply intertwined countries attempt simultaneously to restore a positive balance of payments, the result is a collective descent into deeper recession (some called it the fallacy of composition). In other words, if France is to claw back from its trade deficit, someone else in the Eurozone should do the opposite thereby opening new export outlets for the other Eurozone members. Natural candidates would be Member States with persistent trade surpluses, such as Germany and the Netherlands. Failure to achieve such coordinated action explains a big part of the vicious circle that the Eurozone is currently struggling to escape. It seems appropriate to say that in this case repetita non iuvant.

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