When discussing the Eurozone crisis, most news stations spend most of their time focusing on the PIGS (
Portugal, Italy, Greece and Spain). These are the countries that have faced the most economic turmoil and pose some of the greatest risk to the future of the Euro. However, another problem seems to be looming from the second largest Economy in the European Union. This is the problem of France and its loss of competitiveness in the world market.
France elected François Hollande in May, he spoke of reviving the country’s stalling economy and doing it in his unique way. He did not want to institute the austerity measures that have been forced onto countries such as Spain and Greece. He believes that these measures will hurt France’s economy and has refused advice from Angela Merkel on austerity measures.
François Hollande wants to revive the economy in a social way where tax rates on corporations and the rich would be high and the revenue received would help pay for his social policies. He even states that he wants to tax anybody who makes over 1.0 million Euro a year 75% to raise money. Economists throughout the world worry that he is not doing what is right to regain competitiveness in the French Economy.
One of the biggest problems with
France’s competitiveness is labor cost. With the amount that labor costs in Franceit is hard for their firms to compete globally. These high labor costs make it difficult for companies to create profit, therefore making it harder for them to create jobs.
There are many reasons why
Francehas such high labor costs. First is their strict working and wage laws. In France the work week is only 35 hours. According to the French Institute of Economic and Social Research, this means that French employees work an average of 1679 hours annually. When compared to their German neighbors who work 1904 hours annually, France loses 6 weeks of productivity. Also, while the French on average work less than other countries, their wages are higher. According to Goldman Sachs, Francewould have to cut wages by 20% to be able to compete with Germany. Jörg Krämer chief economist at Commerzbank recently stated that “The minimum wage is nearly 50 percent of the average wage, so it destroys jobs in an extensive way.” These are just a few of the reasons why France has such high labor costs.
Even the International Monetary Fund has called
France out and warned that their lack of competition is hindering growth. They claim that France had problems with competition before the crisis and it is now being emphasized. The IMF has stressed that France must take action to help regain a healthy economy. To start, France must focus on competitiveness and reforms that will lead to jobs and growth in the economy. The IMF cites that France must join its neighbors such as Germany, Italyand Spain and adapt a strategy to become more competitive in the world market. The IMF also wants Franceto rationalize its government spending and make appropriate decisions on spending on all levels of the public sector.
While some may think reform in a stubborn welfare state such as
Franceis not possible, they should look to their neighbors in Germany. In the late 90’s Germanywas considered a “sick” economy with an unemployment rate over 11% and a growth rate near 0%. However, Germany instituted reforms on all levels of their economy. They have made it easier for firms and unions to come to agreements that better serve their interests for the long-term. This has made the German job market more flexible which helps it withstand economic booms and busts better than before.
Overall, I believe that
France needs to make their economy more flexible. I am not advising that they cut all social spending and become a more capitalist society such as the United Sates or the United Kingdom. I am just stating that they should look over to Germanyand make similar economic decisions that will help them regain a competitive edge in the global market.