20160113-NATIXIS-Can_France_avoid_austerity__11页_666kb

FLASH ECONOMICS - Can France Avoid Austerity?

Core Content

This document from Patrick Artus examines whether France can avoid austerity measures similar to those implemented in Spain, Portugal, Ireland, and Greece following the 2008-2009 financial crisis. It evaluates the effectiveness of such policies in those countries and analyzes the current situation in France to determine if austerity is necessary or if structural reforms alone can suffice.

Main Points

1. Austerity Policies in Peripheral Euro-Zone Countries

• Spain, Portugal, Ireland, and Greece implemented austerity measures that included:
  • Reduction in wages
  • Fiscal deficit reduction
  • Government spending cuts (including welfare, public investments, and payroll)
• Positive outcomes were observed in Spain, Portugal, and Ireland, with recovery in exports, investment, and employment.
• Negative outcomes were seen in Greece, where the policy failed to stimulate the productive system, leading to a lack of supply response and the rise of radical left political parties (e.g., Syriza, Podemos).
• Austerity policies, even when effective, cause significant temporary costs, such as loss of growth and increased unemployment.

2. France's Current Situation

• France has avoided austerity so far, with:
  • No slowdown in real wages relative to productivity
  • A significant fiscal deficit (3.8% of GDP in 2015)
  • No reduction in sensitive government spending (e.g., healthcare, pensions, education)
• However, the long-term economic challenges suggest that austerity may be necessary.

3. Structural Reforms vs. Austerity

• Structural reforms are necessary for France, but they cannot be considered austerity:
  • Increase competition in the service sector to lower prices and improve demand and industry competitiveness
  • Introduce a new employment contract that balances flexibility and protection
  • Reform the vocational training system to align with current job markets and improve labor skills
  • Promote apprenticeships and work-related training
• These reforms are seen as essential for long-term growth and productivity.

4. Competitiveness and Profitability in France

• Unit labor costs in French manufacturing remain high compared to Spain and are not significantly improved despite corporate tax cuts (CICE)
• The trade balance (excluding energy) has deteriorated since 1998 due to weak cost competitiveness
• The recent improvement in the trade balance is attributed to euro depreciation, which boosted exports
• Profit margins for French companies remain 3 percentage points below normal levels, even with recent improvements due to lower oil prices and euro depreciation

5. Fiscal Sustainability

• To achieve fiscal solvency, France needs to reduce its fiscal deficit by 1.5 percentage points of GDP
• This can only be achieved through government spending cuts, as tax burden remains high
• A moderate austerity is necessary, but it should be less severe than in the peripheral countries

6. Conclusion

• Moderate austerity is required in France to improve competitiveness and profitability
• However, it should be measured and not as drastic as in Greece or Ireland
• While structural reforms are not austerity, they must be complemented with controlled fiscal adjustments
• Austerity may lead to public discontent, potentially benefiting political parties like Front National
• The required austerity measures include:
  • A 5% reduction in wages
  • A 1.5% reduction in government spending as a percentage of GDP

Key Information

• Wage freeze or reduction may be necessary to improve competitiveness
• Government spending cuts are essential for fiscal solvency
• Structural reforms (competition, labor market, vocational training) are not austerity but are still needed
• France's current fiscal deficit is 3.8% of GDP in 2015
• Real wages have not declined relative to productivity
• Profit margins are still below normal levels
• Austerity is not the solution, but measured austerity may be unavoidable

Summary

France has so far avoided austerity, but long-term economic challenges suggest that moderate austerity measures may be necessary. The country needs to improve cost competitiveness and profitability, which could require a 5% reduction in wages and a 1.5% cut in government spending. However, these measures should be less severe than those implemented in Greece, Ireland, and Spain. Structural reforms, such as increasing competition, improving labor market flexibility, and modernizing vocational training, are also essential but should not be classified as austerity. While austerity can lead to public backlash and support for anti-austerity parties, it may be a necessary step for France to ensure economic sustainability and fiscal responsibility.