Thursday, 16 May 2013

FRANCE: Hollande's policies & the recession

France has entered a shallow recession in the first quarter of the year as the economy contracted by 0.2 per cent. The data from the INSEE (National Institute of Statistics and Economic Studies) statistics agency, released on Wednesday, marks France's first recession in four years.

The gross domestic product (GDP) contracted because of weak exports, investment and household spending, after shrinking the same amount in the last quarter of 2012. Two consecutive quarters of contracting GDP are indicative of an economy in recession. The announcement comes after the number of jobless people hit an all-time high in March.

French growth has faltered with increasing unemployment undermining the confidence of both consumers and businesses, which are struggling to cope with government belt-tightening.

Unemployment in France is soaring and the historical record of 3.2 million out of work has been broken. Factories are closing down as the government openly admits unemployment will deteriorate further in 2013.  ArcelorMittal’s blast furnaces in Floranges and the PSA plant in Aulnay are among factories which are closing and laying-off workers as business stagnates. Tax increases have stifled the economy but a VAT increase is planned for 2014 and the president is talking of pension reform. Those who voted for Mr Hollande are clearly disappointed at what they consider to be broken promises.

INSEE said investment contracted 0.9 per cent in the first quarter, with business investment down 0.8 per cent, while exports contracted for the second quarter in a row, shrinking by 0.5 per cent. Household consumption dropped by 0.1 per cent, contracting for the first time since the second quarter of last year despite higher spending on energy due to a particularly cold winter. Most private sector economists say the economy would be lucky to grow 0.1 per cent this year, as Hollande's government forecast last month that it would.

There is a real risk of a further downgrade by the rating agencies - and it might compromise France’s present luck in low borrowing costs, especially as France is still dependent on foreign investors for 62 per cent of its public debt.

The media is calling Socialist French President Francois Hollande ‘Mr Weak’ and accusing him of being ‘too normal’ and slow and inactive in the face of the economic crisis. The president claims not to be implementing any austerity measures but three ministers have openly disagreed with the government’s official line and several socialist members of parliament have asked for a change to more traditional leftist spending policies.

The president attracted anger from the far left in January 2013 by letting employees and employers’ unions negotiate flexi-security competitiveness agreements. These are a form of labour market flexibility - perceived as ‘liberal’ - and Mr Hollande also rejected a communist bill in April which wanted to create an amnesty for workers convicted of offences - except for physical violence - during strikes and other protests.

But France is lucky as its borrowing costs are at a historical low and it has been given two more years by Brussels to meet its deficit targets. France is not a ‘normal’ country because it is the second power in Europe and half of the Franco-German motor behind the European Union.

It is probably seen as ‘too big to fail’ both by investors and Brussels - with a 20 per cent contribution to the European mechanism and a similar share of its GDP in the euro-zone. A French default would have a dramatic impact on the entire euro-zone.

Mr Hollande probably exploits this position to avoid imposing harsher measures. It is hard to see, given the current French economic decline, how harsher reforms can be postponed any longer. More socialists are echoing the call of the far left and pushing for more public spending.

The question remains whether Mr Hollande will go against his majority and impose his vision.
In just one year since he was elected, the president has changed towards more economic realism. But the reforms required demand more and if Mr Hollande chooses ‘business as usual’ he will compromise the stability of both France and Europe.

By Guylain Gustave Moke
Political Analyst/Writer
Investigative Journalist
World Affairs Blogger

Photo-Credit: AFP: French President Francois Hollande