‘Chapeau’ to the French economy, which is being trumpeted by some as Europe’s star performer since the pandemic. But what, if anything, can we learn from this?
First, some numbers. The French economy has indeed bounced back relatively quickly. GDP was 0.9% higher in the fourth quarter of last year compared to the same period of 2019, before Covid struck.
In contrast, GDP in the UK was still 0.4% below the pre-Covid level, Italy was down 0.5%, and there were even bigger shortfalls in Germany (1.1%) and Spain (4.0%). The outperformance against Germany is particularly impressive, because France, like the UK, suffered a much larger hit in 2020.
France has also done relatively well on inflation. Based on the EU harmonised measure, French consumer prices rose only 3.3% in the 12 months to January, the lowest rate in the EU. The national measure was just 2.9%.
UK CPI inflation was 5.5% in January, and likely to top 7% in April (even before the Ukraine crisis), while inflation in the US is already 7.5%.
What’s more, these differences appear to be genuine, rather than statistical quirks. In particular, the French have taken a similar approach to measuring the impact of the pandemic on the output of the public sector as the UK. This helps to explain why both countries reported larger falls in 2020 and relatively strong growth in 2021.
So, how has France pulled this off? The US economist Paul Krugman has heralded the French outperformance as an example of the benefits of high levels of state intervention in the economy. He is only partially right.
The French economy was always likely to have a good pandemic, because of the nature of the crisis. It is much easer for the government to step in and protect businesses when the government is already heavily involved in running them.
French government spending was already 55.3% of national income in 2019, the highest in Europe, and well above the comparable figures of 40.3% in the UK and just 38.3% in the US. In 2021, it hit around 62%.
The pandemic also played to the strengths of the French civil service, which is dominated by a technocratic elite from the Ecole Nationale d’Administration and leading business schools. Public officials and private executives come from similar backgrounds, often moving smoothly between the two sectors. Dominic Cummings might have had fewer problems getting things done if he had worked at the Elysee, rather than No 10.
However, there are some huge caveats. For a start, it is a bit odd for Krugman to hold up France as an example that the US should follow, when the economic recovery in the US has been even stronger. (US GDP was 3.1% higher in the fourth quarter of last year than its pre-Covid level.)
France has done better than the US on employment. But so have many other countries – including the UK, Germany, and Australia – which chose to protect jobs with furlough schemes rather than just top up the benefits paid to the unemployed. There is nothing particularly Gallic here.
More importantly, what works a little better during a once-in-a-generation crisis is not necessarily the best model in more normal times. Here, the problems of the French approach are much clearer.
One is persistently high rates of unemployment, particularly among young people. French productivity appears to be high partly because only the most productive people are able to find work. Another is that the heavy burden of tax and regulation makes life particularly difficult for small and medium-sized enterprises, and deters global companies from investing in France.
The French public finances are also in poor shape, and will get much worse as the population ages. The government looks set to keep spending more than half of national income for the foreseeable future, with debt well above 100% of GDP. Membership of the euro means that France has lost the flexibility provided by having your own national currency and an independent central bank.
The ways in which France has kept inflation down are problematic too. In particular, the government has chosen to transfer the burden of higher energy costs from households and businesses to taxpayers and shareholders in energy companies (itself included).
This short-term fix has been popular (this is, after all, a presidential election year). But it has also further distorted the markets, and shielding everyone from higher prices (regardless of need) is very costly. Many commentators have also raised concerns over the willingness of the French government to exploit state-controlled companies for political purposes, even if they are partially privatised.
Above all, France itself now recognises at least some of these problems. Presidents Hollande and Sarkozy attempted reforms, without getting far. But President Macron has made some progress in modernising the pensions and benefits system, reducing the burden of regulation, and lowering corporate taxes.
Ironically, then, part of the recent French success story reflects a shift towards more ‘Anglo-Saxon’ liberalism, and away from socialism ‘with French characteristics’.
Indeed, one of the main reasons why the French economy has outperformed is what has happened to business investment. This has rebounded strongly in France, but in the UK it is still more than 10% below its pre-Covid level.
UK business investment should catch up in 2022, helped by tax incentives (the temporary ‘super-deduction’) and the easing of both Covid and Brexit uncertainties. Net trade has also been a more persistent drag on the UK economy (again partly Brexit related), but this should lift too.
Nonetheless, the fact that France has stolen a march here is a warning to the Chancellor. If even France is now getting its act together, the UK’s traditional credentials as a far more friendly place to do business cannot be taken for granted.
Rishi Sunak’s Mais Lecture suggests he is well aware of these challenges. The question is whether he will be able to close the chasm between rhetoric and reality.
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