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AB 2000 studies

Alain Boublil Blog


The French social model and growth

The publication of the first estimations of French economic growth during the 2018 4th quarter (+0.3%) and the whole year (+1.5%), after 2.3% in 2017, has offered the possibility of several interpretations. From government point of view, it is thought that this result is reassuring. International environment has been less favorable and shows important instability risks. The social crisis the country is going through since November has also weight on activity. The current economic policy is the right one and starts to produce its returns. The version of events is different inside the opposition. Purchasing power stagnation has affected household consumption and the increase of the trade deficit shows that the supply side policy put in place in 2013 to restore corporate competitiveness has failed. The symbolic fall of the number of jobseekers (-1.4% year-on-year)) is certainly better than an augmentation but is not able to take France out of massive unemployment.

Economists also are split. But a new argument went into the debate: the responsible of the near economic stagnation France is going through since the financial crisis in 2007-2008 would be its “social model”. The level of charges is excessive and its working by public institutions is inefficient. If France appears in international comparisons with a burden of public charges among the highest in the world, it is also the consequence of its organization. In Northern Europe, where social protection is not clearly inferior to what we have in France, to the difference of Anglo-Saxons countries, these charges frequently are collected through private channels. So their charges ratios appear inferior to France ones. The French social model and its criticism will be at the heart of the national debate in the coming years.

2018 published numbers are not confirming this criticism, especially regarding household behavior. Social charges and tax increases, real or felt or even anticipated, have generated, since the beginning of the second quarter, a consumption pause. Despite the persistence of historically low interest rates, it has been observed a turnaround in the house building sector. In 2018, housing starts and permit authorizations, which is worrying for 2019, have felt by 7%. Household are not only cutting back on their daily expenditures but they renounce to acquire homes and are starting to hoard, which is an undisputable sign of their worries about the future.

On the corporate side, and especially the biggest ones, the situation is different. Their margins increased since the crisis thanks to tax and social charges reductions. The profit surplus has been given to shareholders through dividend distribution and to top managers whose payroll was linked to profits. Investment has also profited but it has poorly been oriented to production capacities increase due to a stagnant local demand. The situation is not the same according to the nature and the level of activity. For a major international company, anticipations about local demand have low importance. The appropriate indicator is the world demand and investments will be affected where they are the most pertinent to satisfy it. Fiscal incentives they were recipients have not been used inevitably in France. As far as industrial fabric and services are concerned, the determining variable is the local demand. Its low growth has not incited companies to affect new resources to develop themselves.

The French “social model” has two components. It aims, under labor rules, to guarantee employees situation. This guarantee is considered as excessive and would impeach hiring people. It would constitute one of the main reasons of the massive unemployment which hurts France. The second component is about social protection through the collective taking into charge of wealth expenditures and pensions; its excessive cost is blamed and these charges, even if a share of them is taken by the state, would have a too big weight for the enterprises. A full political message has been elaborated around the criticism of policies developed in the past to protect these social benefits. When it is explained that nothing has been done during the past thirty or forty years and that is the point which is at the origins of the problems affecting the country, it is the refusal, by all political forces during that period, to reconsider this model, which is directed at. The trial of the “old world” is based on its incapacity to adapt itself to the “new world”. During that period, wealth accumulation and globalization have changed the behaviors of economic agents and it is necessary to take that into account in economic policy choices. In fact, if there were something to reconsider in this model, it would be its bureaucratic heaviness which weights on the daily life of French people as on corporate activity, but we are not taking that way.

But the proposed cure has all the chances to be worse than the harm because the whole economic system has been built on the search of some safety which has become a synonym of the social progress and which has been included in household and corporate behavior. People spend, all along the working life because we believe we have a safe job and our pensions are protected. You get a lease to acquire a home because the owner thinks that you have permanent resources. Banks do the same: they offer loans if you have a stable situation which allows you to reimburse it. Collective prosperity is deeply linked to the security offered by the social model. Speeches aiming at putting in question this model had the opposite consequence to what was expected: they have contributed to the weakening of consumption to the profit of   growing precautionary savings. French people even became saving world champions because these who had a job were afraid by losing it.

Speeches about pension system reform are perceived as another threat on their future level of live. These threats are unjustified for three reasons. Pension systems have huge reserves, above 100 billion. As en average, thanks to the increase of life duration, you inherit just a little before you retire. Every year, it is near 250 billion which are transferred to the future pensioners who, atop of that, will benefit from the savings they accumulated or who are homeowner, as half of the French population. But all that supposes that the country keeps a growth rate strong enough to reduce at last unemployment and allows the indispensable wealth redistribution which guarantee the country political and social equilibrium. The speech about the mistakes done during the previous thirty or forty years, to the opposite, contributes to make this equilibrium more fragile and to spread in the country an anxiety feeling whose consequences can be observed in the French economy last figures.

Wrong reasoning can lead to adopt policies which lead to the opposite result to what was expected. The putting into question of the French social model, unfortunately could give us another example.               


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