The impression in France of a significant deterioration of the economy and living standards
The French are extremely pessimistic about the economy and living standards, as showed by a recent international optimism poll conducted by BVA – Gallup international. Yet, the French unemployment rate is lower than Spain and Portugal, and households' real income and spending are still increasing while they are falling in Spain, Italy and Portugal. The French fear a reduction in of social welfare, even though the welfare system has actually become more generous at a time when it has declined in Germany.
State of progress in France’s adjustment
In terms of the adjustment process, let us look at French public finances, competitiveness and foreign trade, and the financial position of French businesses and their product sophistication.
1. Public finances
In 2012, only Spain will still have a fiscal deficit higher than that of France. Meanwhile, the debt ratio will continue to increase in France at a time when it is falling in Germany and has stabilised in Italy.
2. Competitiveness, foreign trade
France and Italy have a higher unit wage cost than Germany, which explains the continuing losses of export market shares for these two countries; whereas Spanish and Portuguese exports, where producer costs are low, are now growing rapidly.
Indeed, France has a large trade balance deficit in manufactured goods yet Spain and Portugal now have an even trade balance. Meanwhile, Italy and Germany have trade balance surpluses. As long as international capital mobility remains low in the euro zone, due to the “renationalisation” of investors' portfolios caused by the crisis; countries will be subject to an external balance constraint. Indeed, France is the only country that has not yet reduced its current-account deficit.
An improvement in foreign trade can be achieved either through an improvement in cost-competitiveness, hence a fall in wage costs, or through a contraction of domestic demand, which reduces imports. At present, the unit wage cost is increasing faster in France than in Germany and all the other struggling euro-zone countries causing domestic demand to continue to increase instead of fall as in Spain, Italy and Portugal.
3. Financial position of businesses and product sophistication
In contrast to other euro-zone countries, the financial position of French businesses continues to deteriorate. It is clear that the deterioration of corporate profitability is due to the low level of product sophistication in French industrial output, which means that French businesses find it harder to pass on rises in production costs to consumers, contrary to what can be seen in Germany, Spain and even Portugal. This is extended by France’s slow productivity gains (efficiency in producing products), which are recovering in Spain and Portugal.
All in all, practically everything remains to be done in France:
France still needs to reduce its fiscal deficit, improve competitiveness/ foreign trade, and restore profitability (productivity) and product sophistication.
Meanwhile, these adjustments have been completed in Germany and are progressing well in the other euro-zone countries. Italy and Portugal now have small fiscal deficits; Spain and Portugal have seen improvement in cost-competitiveness; external deficits have been reduced in Italy, Spain and Portugal while both corporate profitability and productivity have also improved; and Spanish and Portuguese products have become more sophisticated as shown from their ability to pass on higher production costs to consumers.
This all points to a risk of more restrictive fiscal policies in France, a fall in wages, and efforts to restore productivity by businesses (as in Spain and Portugal), which will inevitably be costly in terms of employment.