I appeared on the Today Programme (fast forward to 1hr 18m 14s) this morning. The main topic was France. It is amazing how France is viewed as being alongside Germany in terms of economic standing, dispensing advice and judgement to the peripheral countries in the Eurozone crisis when in fact it has far more in common with those countries than is does with Germany. In particular:
• France’s public debt was 79% of GDP at the end of 2011 and is expected to rise to 84% this year and 86% next year
• The French public sector accounts for 56% of GDP - 10 points higher than Germany - and tax revenues are 51%
• France has run a current account deficit for 10 years which now stands to be almost €100 bn by the end of the year, and its export performance is worsening: its share of Eurozone exports has fallen from 17% a year ago to just 13%. It now exports less than Holland which has 16 million people compared with 63 million in France
• Unemployment in Franc e is over 10% despite it being almost impossible to make anyone redundant, compared with under 7% in Germany
• France is uncompetitive: its average hourly wage rate is €34 compared with €30 in Germany and €20 in Spain. Surveys of competitiveness continually show that France is in a poor position: the World Economic Forum shows France in 21st position versus Germany in 6th place; and the Institute of Management Development has France in 29th place behind - in Europe - Austria, Belgium, Denmark, Finland, Germany, Ireland, Luxembourg, the Netherland, Norway, Sweden, and the UK. In other words it is closer to the peripheral countries in this respect than the core of the Eurozone
• President Francois Hollande’s actions so far are precisely the opposite of that sage advice about what to do if you find yourself in a hole: he has raised taxes to 75% on earnings over €1m at a time when London is already the sixth largest city for French population, and reversed an earlier planned increase in the retirement age from 60 to 62. His Labour Minister has said ‘The main idea is to make redundancies so costly it’s not worth it.’ That will really help the cause of structural economic reform and labour mobility in a country where firing people is already a near impossibility
• France already lost its triple A status on its debts in January so we cannot say we weren’t warned but this seems to have been forgotten
• Even the IMF which is run by a French woman has warned that the French economy needs ‘a comprehensive programme of structural reforms’ and deeper spending cuts rather than tax increases
Sooner or later the market is going to figure out that France is in a mess and getting worse with dire consequences. French pride makes it unthinkable that it will leave the Euro but staying in will cripple it given the lethal combination of an inability to devalue its currency or to achieve competitiveness through deflation of wage rates.
I was also asked on Today whether we should worry about the US ‘fiscal cliff’. The answer is Yes and No: the so-called fiscal cliff, or the forced increase in taxes and cuts in spending which will occur next year if the President and the Republican controlled House of Representatives cannot reach agreement is in some respects a red herring . As usual in this crisis, if you take the news coverage and commentary at face value, you might believe that if they can reach agreement then all the attendant problems will be solved. Sadly that is not so. The US will have to raise taxes and cut public spending whether they can reach agreement or not. It is going to go over a fiscal cliff anyway.