The Phony French Disaster Story

05/02/2007 12:00am

Dean Baker
The Hankyoreh (South Korea), May 2, 2007

See article on original website

France’s presidential election has put the country in the news again. Much of the coverage is devoted to France’s economic stagnation and its desperate need to overhaul its economy to make it more like the United States. Those familiar with the data may not agree with this assessment.

While France has a very generous welfare state, and its workers enjoy long vacations and short workweeks, it’s not clear that this state of affairs has put the economy on the road to disaster. For example, the Organization for Economic Cooperation and Development (OECD) estimates that France’s level of productivity is 7 percent higher than in the United States. Economists generally view productivity as the most important determinant of living standards. In fact, when measuring the ability of productivity to raise living standards, France’s rate of productivity growth has even kept pace with the United States through the post-1995 productivity boom in the United States.

On a per person basis, France spends about half as much as the United States on health care, yet it enjoys longer life expectancies and lower infant mortality rates. Exploding health care costs threaten both the U.S. economy and the government’s fiscal solvency, yet its political system is so corrupt that few observers see major health care reform as a realistic possibility. France has no comparable problem.

France does now have a current account deficit, but it is in the neighborhood of 1-2 percent of GDP, a level that could be sustained indefinitely. By contrast, the United States has a current account deficit that is hovering near 6 percent of GDP, a clearly unsustainable level. Also, while the United States now is an international debtor, owing an amount that exceeds 25 percent of GDP, France is still an international creditor.

France clearly has a problem with unemployment, with an unemployment rate that is still almost 9 percent, but even the story here is more complicated than is generally recognized. The employment rate (the percentage of the population who hold jobs) in France among prime age workers (ages 25-44) is actually slightly higher than in the United States. The big differences are in the employment rate for younger and older workers.

In both cases, low employment rates in France are driven in large part by conscious policy decisions. In the case of young workers, tuition for French college students is generally free and most enjoy stipends from the government. This means that they have far less need to work than their U.S. counterparts. In fact, the percentage of young people who are unemployed in France is actually about the same as in the United States. The main difference is that many more young people in the United States are working than in France, which means that the unemployed are a much smaller share of the labor force (those employed plus those unemployed) in the United States than in France.

Older French workers are much more likely to be eligible for retirement benefits than their counterparts in the United States. This is arguably a policy that should change as longer life expectancies allow people to enjoy ever longer retirements, but the French presumably recognize that a price that they pay for the generosity of their retirement system is that older people are less likely to work. Of course, unlike in the United States, older workers in France also don’t feel the need to work to get health care insurance, which is provided by the government. 

France’s economy does have serious problems. In particular, unemployment among its immigrant population is at very high levels, in some neighborhoods approaching 40 percent. France has done a very poor job of providing immigrants with the means to integrate into French society and share in the country’s economic prosperity. There is not a simple solution to this problem, but it is important to distinguish between problems associated with integrating France’s immigrant population and problems that are inherent to France’s economic system. They are not necessarily the same.

In fact, one economic policy that could help both the French immigrant population and the French economy more generally would be a more expansionary monetary policy by the European Central Bank (ECB). The ECB has been consistently more contractionary than the Federal Reserve Board in the United States.

Both the U.S. and European economies went into slumps in 2001. The Federal Reserve Board responded by sharply lowering its short-term interest rate, eventually pushing the overnight rate down to 1.0 percent in the spring of 2003. The ECB was much slower to reduce its interest rate and never allowed it to fall below 2.0 percent. This is in spite of the fact that Europe had a lower rate of inflation and far more unemployment than the United States. Even the International Monetary Fund criticized the ECB for its high interest rates. With a central bank pursuing such contractionary policies, it’s hardly surprising that many European countries would have higher unemployment rates and slower growth than the United States.

In short, like all countries, France has its share of economic problems. However, its economy is not about to fall off a cliff and by many measures it ranks near the top of the world. Furthermore, it is arguable that its biggest single problem is the European Central Bank in Frankfurt Germany, not the French welfare state or the underlying malaise of French society.

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