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What's Wrong With Europe? A Chinese Observer Answers: France

Lately, it seems like the whole world is finding fault with the French.

Ratings agency Moody has downgraded France and the International Monetary Fund, the Organization for Economic Cooperation and Development, and the European Commission have all acknowledged that the country needs to undertake critical economic reforms to avoid decline.

The so-called “Five Wise Men” who advise the German government on economic policy issues (the German Council of Economic Experts) are also anxiously making plans for their neighbor. French pride has taken a hit. German media are also pointing the finger at France, saying that the success or failure of the euro zone lies with Paris, not with Madrid or Rome.

France used to rule the world, so what happened?

For decades, successive French governments have always – in private – considered Germany as a rival. France though, has a tough time competing with Germany.

In this competition, romantic French socialism has repeatedly been defeated by the German capitalism. Since the birth of the euro 13 years ago, it has become even harder for France to compete with Germany without the adjustment tool of currency devaluation. According to Goldman Sachs, the French have to reduce their price levels by 20% to be able to compete with Germany.

One of the most important factors in France increasingly losing its competitiveness is due to the implementation of the 35-hour work week 12 years ago.

According to the French Institute of Economic and Social Research, French employees work on average 1679 hours annually whereas their German counterparts work 1904 hours, six more weeks. Were the French really efficient, the working hours would maybe not be so critical. However, the 35-hour week is the result of a long struggle by the workers’ unions, rather than the product of their high efficiency.

French companies also face the headache of a rigid labor market. The chief economist at the Commerzbank, Jörg Krämer, told me that "The minimum wage is nearly 50 percent of the average wage, so it destroys jobs in an extensive way. That, in part, explains the very high unemployment rate in France." Currently, France has an 11% unemployment rate, twice as high as Germany. One in four French people under the age of 25 is unemployed.

According to the European Commission, more than 750,000 jobs in the manufacturing industry have been cut over the last ten years. At 12.5 percent, it is only half as high as in Germany.

The German economy’s secret weapon is its thousands of mid-sized companies across the country. They are much more resilient and flexible than the konzern, the big multinationals, while at the same time possessing significant capital as well as research and development advantages over small businesses.

France’s corporate structure is like a pyramid with a few global corporations on top, a large number of small firms at the bottom, but without sufficient companies in the middle. Part of the reason is that once a company has more than 50 employees, it is subject to strict protection against dismissal. This means companies are rarely willing to hire more than 50 employees. On the other hand, small companies are more susceptible to the impact of the economic downturn. That is why the bankruptcy rate in France is twice that of Germany

A vulnerable banking sector

While the companies are too small, France’s banks are dangerously large. 

At the end of 2011, the total assets of France’s largest bank, BNP Paribas was equivalent to 90% of the country’s gross domestic product. This is higher than the ratio of Deutsche Bank to Germany’s GDP. Traditionally, France has close relationships with Mediterranean countries, so the country's banks are heavily invested in southern European countries. This is also the reason why France advocated a rescue for Greece.

According to the Ifo Institute for Economic Research at the University of Munich, the investment ratio of French banks in the South European countries in crisis is twice that of Germany – France is more vulnerable to the euro crisis worsening, especially if Greece were to exit the euro zone.

Another hidden danger for France is its debt situation. For the past 30 years, the French government hasn’t had a balanced budget. Though President Hollande hasn’t yet given up the target of reducing the budget deficit to 3% of its GDP next year, no one believes that France can comply with this goal.

In contrast, Germany’s debt ratio has been reduced to less than 1%. Next year it will be close to zero.

The premise for reducing debt is economic growth. Though German economic growth has slowed down, it is nonetheless the euro zone’s most thriving economy whereas the French economy has stalled – and even risks shrinking next year.

Jörg Krämer believes France has been going continually downhill in recent years. Nevertheless, to say Europe’s second largest economy will be the euro zone’s next problem child is somewhat an exaggeration. This is because the decline of such a huge economy is an extremely slow process. As the Chinese saying goes, “The body of a starved camel is still bigger than a living horse.” After all, France is still the world's fifth-largest economy and the world’s sixth largest exporter. In the first half of this year, France had the fourth largest foreign investments.

"France still has strong industry and large companies operating across the globe, and its demographic situation is also advantageous for the economy," Dr. Claire Demesmay, of the German Council on Foreign Relations, told us. France has a higher fertility rate and is one of the very few industrialized countries that does not have the problem of an aging population.

Another advantage is that France has relatively cheaper energy costs, thanks to the fact that 75% of its electrical energy comes from nuclear power.

It has been said that the French are the world’s most pessimistic people, and Demesmay agrees. “The French might have a positive view of their personal future, but are not optimistic about their country and their nation. This is basically why they are always against the idea of any reform.”

What they’re saying is since the decline is irreversible, what’s the use of reforms? When former President Nicholas Sarkozy tried to raise the retirement age from 60 to 62, his reforms were met with strong resistance.

President Hollande has a big responsibility. He must implement drastic reforms like those the former German Chancellor Gerhard Schroeder undertook ten years ago, without taking into account personal gain or loss. So far President Francois Hollande does not give the impression that he is someone vigorous and resolute enough for the task, though Dr. Demesmay is convinced that he will be able to turn things around: "His approach is to go down this course without snubbing the French population." That means that he will take more time in implementing the reforms than his predecessor did.

The question is how much more time the financial market is willing to give France. Up to now both France and the Germany are the winners of the economic crisis. But for investors, once France goes from being a salvageable country to a country that has to accept relief, then it won’t be only France that is stranded, but it will shake the entire euro zone foundation. This is why the German government is willing to offend the French by offering its economic advisors’ advice and suggestions.

*Zhang Danhong is a journalist with Deutsche Welle and a columnist at Caixin media

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