Attention is shifting from Greece to France as the most troubled euro-zone country. Last week, the International Monetary Fund warned that without urgent economic reform, the country risked falling behind Italy and Spain. On the same day, industrialist Louis Gallois called for “shock” measures to jump-start French industry, in a report commissioned by the government. He says the nation’s industrial sector is shrinking faster as a percentage of GDP than in many other euro-zone countries. Meanwhile, other French business leaders have been taking their complaints to the press, saying that France’s economy is losing ground not just to Germany, but to the UK, Spain, and Italy as well. Today’s better-than-expected economic growth figures (0.2% growth for this quarter compared to last) gave French finance minister Pierre Moscovici a chance to answer critics (paywall):
France is not the sick man of Europe. France remains the world’s fifth largest economic power that has all its resources but which needs to recover its competitiveness.
In all likelihood he was referring to a reported spat between German and French officials over how to fix the French economy. Allies of German Chancellor Angela Merkel have said that François Hollande’s socialist government isn’t doing enough to spur competitiveness. Coming to France’s defense was Moscovici’s counterpart in Germany, finance minister Wolfgang Schäuble, who said:
I would warn against this constant calling one or the other the sick man or the sick woman. We have trust in the policies of the French government.
Now it’s The Economist’s turn to have a go. In a scathing story in its latest print edition, the magazine calls France ”The time-bomb at the heart of Europe“, saying it’s worse off than any of the usual suspects—Greece, Spain, or Italy—and presents the biggest threat to Europe’s single currency. Pointing to a stagnant economy, high unemployment, rigid labor laws, and absurdly high public spending, it says France’s problems “dwarf” those of other eurozone countries. Worse, while other nations are reforming, France’s leadership doesn’t fully appreciate the magnitude of the problem. The magazine says:
During the election campaign, Mr Hollande barely mentioned the need for business-friendly reform, focusing instead on ending austerity. His Socialist Party remains unmodernised and hostile to capitalism: since he began to warn about France’s competitiveness, his approval rating has plunged.
Then again, soon after getting Gallois’s report, the French government unveiled €20 billion ($25.5 billion) in tax breaks for businesses aimed at boosting competitiveness. Prime Minister Jean-Marc Ayrault said that France is adopting almost all of the “shock” measures recommended by Gallois, saying:
The situation of the country calls for ambitious and courageous decisions. France needs a new model.
Whether he’s sincere about radical reform only the future will tell. In the meantime, France’s turn as Europe’s sick man may be just the kick it needs.