February 3, 2014
Even though the Pantheon in Paris is covered up for refurbishment, it is impossible not to be amazed by the majesty of it. It is where France goes to bury its great men. The roll-call of the dead is impressive, from Napoleon to Victor Hugo. Interestingly, it was right in the middle of the French Revolution when the French were killing quite a few of their great men and wouldn’t have been that keen on such traditionalist, religious ceremonies such as burials.
Indeed, the legacy of the revolution and the subsequent role of Napoleon is everywhere in this part of the city. Just to the back of the Pantheon, opposite a lovely cafe called La Methode, is the Ecole Polytechnique. This is the finest university in France, the breeding ground for the next generation of French technocrats – and it encapsulates much that is good and bad about this wonderful country.
In La Methode, the students sitting around me are members of this gilded elite. Indeed, the very name of the cafe could well be applied to the Ecole Polytechnique. It too is driven by a method, a series of ways of ”doing things and ways of looking at the world.
I have studied and worked with graduates of this place and can reveal that the education, while top-notch academically, is not conducive to independent thinking, risk taking or flexibility.
This very inflexibility is arguably the biggest problem in France at the moment. With well over three million unemployed, a large current account deficit, a massive state sector and a population which is ageing, France is in a bit of a bind.
Added to the fact that the state simply has to prune itself back is the fear that France appears to be a country incapable of changing itself.
The trade unions are extremely powerful and have, until now at least, stymied any moves to reform the way the country works. I witnessed this first-hand myself while working as the French economist for UBS in the mid-1990s. The then prime minister, Edouard Balladur, tried with his finance minister Alain Juppe to bring in modest reforms to the way the train workers’ pensions were to be calculated. There was uproar. National strikes were called. Everyone, and I mean everyone, downed tools. Juppe backed down and later resigned.
Fast-forward to today and it is unlikely, with Francois Hollande’s attentions clearly elsewhere, that the lovestruck and least popular French president ever has the credibility to take on any vested interests. You get the impression that France is just happy to drift along, pretending to be a little Germany, terrified that anyone will cop on to what it actually is: a big Italy.
In the EU, only Italy has recorded slower economic growth in the past 25 years. France’s budget deficit is bigger than Italy’s, and its current account deficit is the largest in the eurozone.
The propaganda, which starts at the Ecole Polytecnique, is that France is Germany’s equal and an essential political counterweight to the Germans’ economic muscle. But to be a counterweight, you need to be, at the very least, economically credible.
This is not the case. Since the creation of the euro in 1999, France’s GDP per head has risen by just 0.8 per cent a year. In Germany, growth per head has been almost double that. This is a phenomenal disparity for countries with similar standards of living and aspirations.
Not only is France not producing so much, it is costing much more to produce much less. French unit labour costs were below Germany’s when I was working on the French economy. Now French unit labour costs are higher. And in 1999, French exports were worth almost 60 per cent of Germany’s. Today, total French exports are less than 40 per cent of total German exports.
As a result of this poor economic performance, the unemployment rate in France is near 11 per cent, a 16-year high; whereas in Germany it is just over 5 per cent, a 20-year low.
The latest economic data all suggest that while much of the EU economy will grow a small bit this year, France is heading for recession.
These are serious days for the Fifth Republic. Talking to French people, you get a sense that the country is in an ongoing crisis which is structural. Unlike Ireland, France didn’t have a boom/bust, credit-driven bubble which went wallop. Its predicament is more one of a lack of any real direction, demanding a re-thinking of its whole economic model. At the moment, the current account deficit is a reflection of the fact that France can’t afford its brilliant welfare state. The budget deficit is financed effortlessly because the world believes that France is at the centre of the European project and it simply could never have a current account financing crisis.
I am not sure about this. Italy and Spain, two huge economies in difficulty, both had near-death experiences in the financial markets last year. Could this happen in France? It has to be a possibility.
Over the years, many people – particularly English economists in the City of London – have been predicting the demise of France, which has not happened. English xenophobia towards France is a long-held prejudice which goes back centuries, and this mutual dislike colours the judgments of both the French and the English towards each other.
But when you are here in Paris, and you look at the performance of France in the past 20 years, it’s hard not to conclude that something has to give.
For the time being, France continues to punch above its weight, and its extraordinary history and culture reinforce that this was a very significant country. But you can’t help concluding with the words of that giant of French literature, Marcel Proust, that many in the French elite are simply longing for the past – A la Recherche du Temps Perdu.
David McWilliams’s daily analysis of the global economy can be read by visiting globalmacro360.com