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France is finally facing the music after decades of failure

Our neighbour across the Channel has shown an ability to thrive against the odds. But trouble lies ahead

Barely a day goes by without some new scare story about how taxes are due to rise or some benefit is due to be cut. In fact, in our neighbour across the Channel, things appear to be just as bad, if not worse. The new French prime minister, Michel Barnier, our old Brexit adversary, has picked up a poisoned chalice.
Several times in my career I have asked the question: “Why is France doing so well?” This has usually brought forth a torrent of protests from people saying that France is doing very badly.
Did I actually mean what I said? I did. For all the negative comments in this country about the French economy, for most of the post-war period, it has done pretty well. Its per capita GDP has at times been notably higher than ours.
This is despite the frequently bizarre policies pursued by its governments. That has been the force of my question. If we had pursued the sort of policies they have, we would surely have been bust decades ago. So how did they manage to thrive?
I have never come to a thoroughly satisfactory answer to my question. There are a few candidates. For a start, France is what you could describe as a naturally rich country. It is a large territory, diverse in type and climate. It has a very strong agricultural base, a vibrant tourist sector and a strong position in a number of key industries.
The second factor, I have ventured, is that it has an extremely talented class of business executives and effective senior civil servants.
Some people have tried to suggest that French success is due to an innate closet protectionism. They are not wrong to suggest that this exists. But in the Anglo-Saxon economic tradition at least, such protectionism brings no benefits. On the contrary, it is impoverishing.
My third suggested answer is a bit of a cop-out but nevertheless I think it is cogent. For a naturally rich country like France, imbued with talented business leaders and civil servants, and with many pressures bottled up as a result of its innate protectionism, it takes a long time for things to go badly wrong.
But eventually they do. It seems to me that France is on course now for things to go badly wrong.
Weak public finances are a major problem. The outgoing finance minister, Bruno Le Maire, recently said that this year the government deficit could hit 5.6pc of GDP, well in excess of the government’s goal of 5.1pc.
President Macron had pledged to bring the deficit below the EU target of 3pc of GDP by 2027. Achieving anything like this is going to require some combination of much higher taxes and severe spending cuts.
Doubtless this sounds familiar, but the French fiscal situation is more serious than ours. At 111pc of GDP, government debt is higher than our 101pc.
This has not always been true. In marked contrast to the UK, where public debt was very high in the early post-war years as the result of massive borrowing in the Second World War, French public debt was averaging about 20pc of GDP right up to 1980, when it was the lowest in the G7.
Beginning in the late 1970s, however, the annual budget deficit started to climb, driven by large increases in government spending. In 1960, this was running at about a third of GDP. By 2023 it had reached 58pc.
At the root of France’s high public expenditure is a very generous regime of state benefits and a high public sector wage bill. France’s expenditure on public sector pensions alone amounts to 14.5pc of GDP, about twice the OECD average.
Several governments have tried to tackle the gathering public debt crisis but they have failed.
There simply isn’t the political support for austerity in France, and there is a long tradition of public protest to which governments typically surrender.
President Macron wanted to be a radical reformer and he did succeed to some degree, notably in pushing up the retirement age. But he is now in a very weak position for the last years of his presidency.
Meanwhile, on both the Left and the Right of him are people who want to rescind his pension reforms and whose answer to France’s economic problems is yet more public spending.
In these circumstances, it is unlikely that France is going to be able to make a major adjustment in fiscal policy before the next presidential election in 2027.
And – unless a strong presidential candidate emerges from the centre – it seems likely that whoever wins that election will want to carry on with high state spending and borrowing.
Most British people don’t understand French politics. They routinely describe the RN party and its leader, Marine Le Pen, as “far Right”. There is a lazy assumption that she is a sort of Thatcherite, advocating a small state and low taxes.
At least until recently, that would ordinarily be associated with the Right wing in the UK and the US, but in France this is not the case.
Marine Le Pen is an interventionist and believes in a large state. If the term “far Right” has meaning in relation to her policies on immigration and national identity, her inclinations on economics would be better described as “far Left”.
The euro has been a key factor enabling France to carry on its slow progress towards a fiscal crisis.
In the old days, a run on the franc would have precipitated a bout of fiscal tightening. Now that cannot happen. French bond yields have risen in relation to their German equivalents, but not by much. France is still perceived as a core member of the euro zone, bracketed with Germany.
But in the absence of a major fiscal retrenchment, this market insouciance cannot continue. Fiscally, France has more in common with Italy and Greece. There may be trouble ahead.
Roger Bootle is senior independent adviser to Capital Economics. [email protected]

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