France – New Elan Takes Hold of Economy

by CFI | January 13, 2015 2:13 pm

The triple terrorist attacks that rocked France last week will have a negligible impact on the country’s economy. According to Economics Professor Todd Sandler of the University of Texas Dallas business confidence is seldom affected when terrorists strike in advanced countries: “Their economies are usually pretty resilient and have ways of equilibrating and adjusting to risk. People know the security forces will do their job, and a central bank can take action if needed.”

However, sluggish economic growth will keep the French economy teetering on the brink of recession throughout 2015. Even the more optimistic of forecasts have France’s GDP expanding by no more than 0.8% in 2015 – a slight improvement over the 0.2% growth registered in 2014. The latest numbers released by the Organisation for Economic Development and Cooperation (OECD), show that a slight gain in momentum may be expected in 2016 with growth perhaps reaching as high as 1.5%.

Earlier this month, President François Hollande pledged not to seek re-election in 2017 should unemployment remain above 10%. In order for joblessness to decline, France needs economic growth to exceed one percent. In an interview with France Inter radio, President Hollande revealed that he will meet German Chancellor Angela Merkel shortly to discuss ways that could help revive Europe’s economic fortunes in general and France’s in particular.

“However, sluggish economic growth will keep the French economy teetering on the brink of recession throughout 2015. Even the more optimistic of forecasts have France’s GDP expanding by no more than 0.8% in 2015 – a slight improvement over the 0.2% growth registered in 2014.”

The French president solemnly promised to use the proceeds of any excess growth – anything over 1% – towards the reduction of the budget deficit which currently stands at 4.1%, well above the 3% maximum allowed for by the European Commission. Late last year, the European Commission granted France a three-month extension on the time it has to prove that policy measures put in pace will in fact reduce the structural budget deficit to within the 3% of GDP allowed for under the Stability and Growth Pact.

Lower oil prices and a weaker euro may yet save the day. Policymakers in Brussels admit that the knock-on effects of these new conditions could very well help tip the balance in Paris’ favour. While the commissions economists are likely to strip France’s deficit forecasts of any cyclical windfalls and concentrate instead on structural improvements, the country is now likely to meet its targets without imposing additional budgetary restraints and thus escape the EU’s ire.

Meanwhile, the “exceptional contribution to solidarity” of 75% on annual earnings in excess of one million euros – the much maligned “super tax” on the rich – is set to expire on February 1. A fiasco by any measure, with the possible exception of Gerard Depardieu’s hilariously pompous departure to fiscally less-taxing Russia, President Hollande’s flagship measure brought less than €500m into the national treasury.

The tax did signal the administration’s animosity towards business and, as such, helped drive investors away. Foreign direct investment (FDI) dropped from an annual average of $84bn in 2005-2007, to less than $5bn in 2013 thus vindicating Emmanuel Macron who in 2012 warned that President Hollande’s tax plan would turn France into a “Cuba without sunshine.”

In August 2014, Mr Macron was appointed minister of economy, industrial renewal, and information technology in the cabinet of Prime-Minister Manuel Valls. The former presidential advisor may now try and undo the damage wrought by the misguided policies implemented during the first half President Hollande’s term in office.

Minister Macron brings a measure of flair and vigour to the otherwise uninspiring Valls cabinet. He was present at the glitzy Consumer Electronics Show (CES) in Las Vegas to promote France as a welcoming place for high-tech start-ups. After posing for the unavoidable selfie, Minister Macron went out of his way to emphasise that France is back in business. “I don’t want a country completely resistant to innovation, to modernization, to acceleration – that’s exactly the opposite of what I want.”

Some 120 French companies showcased their gadgets and services at the CES – the biggest national delegation from Europe. With a stellar reputation for getting things done, Minister Macron enjoys the highest popularity ratings of any cabinet member. The moment for France to shed its image as a country hostile to business and innovation is now.

Source URL: https://cfi.co/europe/2015/01/france-new-elan-takes-hold-of-economy/

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