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Is France The Euro Nation To Worry About?

James Kerin

Over the course of the euro crisis, a handful of European nations have repeatedly graced the front page of business sections internationally, and for all the wrong reasons. The usual suspects are known as the PIIGS nations, namely Portugal, Italy, Ireland, Greece and Spain. Coverage of other troubled European Union (EU) nations has been limited, perhaps because of comparison to the rest of its neighbors. One such country is France, which is plagued by high levels of public debt, chronic joblessness and a rising current account deficit. It is essential that France balances its budget, regains competitiveness and reforms its tax code, in order to achieve sustainable growth in its economy.

The Presidency
The 2012 French presidential election was a heated battle: party disagreements were heightening and national problems intensifying. The incumbent, Nicolas Sarkozy, was known for his conservative outlook and policies. Running on an anti-austerity platform, Socialist Party candidate François Hollande pushed for higher taxes on the rich and prioritizing economic growth over budget slashing. As a result, Hollande narrowly beat out Sarkozy for the presidency. The outcome of the election signals an important consequence for Europe: that France may not be as interested in the welfare of the European Monetary Union (EMU) so much as its own interests. Paradoxically, the two are often the same.

Cultural Movements
Two-thirds of the citizens of France consider globalization "disastrous." Globalization, or the tendency of different national economies to become more integrated, indisputably results in higher levels of productivity and an outward shift in the Production Possibilities Frontier. However, globalization has historically run against the grain of the French way of life, as the legacy of absolute monarchy, Catholicism and the Jacobins finds it hard to admit that something can be good if it has not been conceived to be so.

A steep drop in the competitiveness of French business has prompted its exports to fall as well. Ineffective politics may be the source of this drop-off. French leaders must reverse this trend, emphasizing growth through competitiveness while providing a business- and worker-friendly atmosphere.

Austerity also leaves a bad taste in the mouths of French voters and is a main reason why ex-President Sarkozy found himself out of a job. While President Hollande has agreed that the budget deficits of nations in the EMU should be limited, he would like the European Central Bank to tolerate more inflation. He also favors collective euro bonds for national debt. Both ideas are sharply opposed by Berlin.

Anti-austerity sentiment is shared by a group of other countries in the EMU, but these nations tend to be similar to France in their heavy burden of public debt. France is a critical voice in the European austerity debate. Unless France can set its economy back on track, it may find itself underwater as well, unable to lend a helping hand to its drowning neighbors.

Economic Woes
The Government of the French Republic has experienced balance sheet issues for years. France's public debt is now estimated to be over 80% of its GDP and growing. One of the greatest benefits of the EMU is also its biggest flaw: the union's shared currency implies that France's burgeoning budget deficit affects the EMU as a whole. In an effort to address these issues, President Hollande has proposed a 75% marginal income tax rate on all income over $1.3 million as well as a marginal tax rate of capital gains of up to 60%. These hikes would only generate an estimated additional $300 million in tax revenue.

While the public sector struggles onward, France's private sector is hardly doing better. The financial industry is in shambles; French banks are undercapitalized and overexposed to debt in PIIGS nations. Unemployment in France is rising fast, surpassing 3 million workers for the first time since 1999. Furthermore, an increasing amount of disillusioned French businesses are leaving for greener pastures abroad. French politicians must find a way to stem this bleeding now.

The Bottom Line
France may well be the hill on which the euro crisis rallies or on which it dies. Unfortunately, the choice is up to France. While austerity and globalization are clearly unpopular, France will have to embrace both in order to regain its productivity and economic growth.

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