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AB 2000 studies

Alain Boublil Blog


The French economy paradoxes

The French economy is doing a little better for two years. It was not very difficult after the near stagnation it has known between 2012 and 2016. But this improvement is not enough to cope with the several disequilibrium which affect it. Unemployment stays at a high level and growth prospects are not strong enough to siognificantly reduce it. High trade deficit is an exception in the eurozone where Germany, Nederland and Italy are accumulating surplus. This situation affects France image and so its influence in Europe. At last, the coming back under 3% of the public finance deficit these previous two years has not been sufficient to slow the debt increase. The analysis of detailed 4th quarter figures INSEE has just published reveals paradoxical situations which explain these unconvincing results.

As a first paradox, if the economy is growing with a low rhythm and unemployment stays at a high level, French household have never been so wealthy and they even will go on to get wealthier. They are even the richest among European countries having a comparable population size, thanks to their real estate assets. Near 60% of household are homeowner against 44% in Germany for instance and especially the value of these properties is much higher. They also have a high financial saving to which pension rights must be added. And they do not depend of future returns of their pension funds, as in Germany, or of the corporate ability to deliver their rights as in the U.K. or in the U.S. The recent trend, instead of reversing itself, is getting stronger. Since last autumn, the property tax reduction and the decisions taken in December to cope with the social crisis which is hurting France, have allowed a 1.1% increase of the available revenue, following INSEE published figures, after it had been stagnant since the beginning of the year. But this improvement has not benefited to consumption which was flat during the 4th quarter. The 6.5% fall of VAT receipts during the first two months of this year shows there are no signs of a rebound. French people have not more tried to take advantage of the exceptionally low interest rates to acquire a home. New housing starts were down by 5% during the previous six months. So, where the money did go? The answer is: toward financial saving, whose rate has reached 5.1% of available income, which is a record high. The average for the previous years was 4%. French people reaction to the decisions which were supposed to deliver to them more purchasing power which would support economic activity has been an increased of hoarding, probably due to worries about future reforms, all of them targeting a weakening of their social rights.

As a second paradox, the improvement of corporate financial situation thanks to several tax reforms adopted during the previous five years is significant but it did not generate nor a better competitiveness which could have produced a reduction of the trade deficit, or a significant investment rebound. To the opposite, according to a Standard & Poor’s study, there has been a gross indebtedness increase which has alarmed a lot of commentators. Corporate investment increased by 3.7% in 2018 against 4.4% in 2017. But it has been much more dynamic in services (+5.3% after +7% in 2017) than in the manufacturing industry (2.3% after 3.7% in 2017). Financial margins remained at a high level, around 32% as the self-financing rate, 95.5% as an average during the last two years. How to explain, then, the exceptional increase of their gross indebtedness, from 135% to 175% of the GDP in 10 years when we see that in Germany it represents only 85% and in Italy 105%, where it constantly declines for five years? France is finding itself in the situation of a country which has made financial sacrifices to improve the situation of its enterprises without, as a return, obtaining that the result corresponds to its expectations, neither as employment is concerned, nor regarding foreign exchanges. A top of that, its enterprises hugely indebted themselves. Given explanations carry a lot of lessons.

These borrowed financial resources have not been totally spent since the study is about gross indebtedness. We are in presence of a new behaviour, the borrowed treasury, made possible thanks to the very low interest rates level. But when these resources were spent, a large part of them has been used to finance foreign direct investments, to pay dividends and to buy back shares. The companies which have recourse the most to indebtedness were these where the State was an important shareholder. EDF, SNCF network and SNCF travels, Renault, La Poste and ENGIE have accumulated as a total 275 billion euro of gross debt. If we come back to the German example, it is possible to see the essential strategic difference between the enterprises of these two countries. German groups have invested at home and exported. French groups indebted themselves, have invested outside of the country, have reduced employment at home and have imported.

As a third paradox, the State, in order to reduce its debt, is selling stakes in companies which pay to it copious dividends when interest rates against, it is necessary to say it again, forecasts made by most of the economists, have never been so low. In March, the Ten years bond rate fell from 0.55% to 0.24%. The yearly cost of the public debt is falling for three years and it would fall much more if the State stopped to have recourse to its issuance premiums policy and its indexed bonds which make it lose a large part of the benefits generated by the rates fall. Through its going out of strategic enterprises capital, the State also renounces to decisive action tools and its passivity will be reproached to it when other industrial jewels in essential sectors as energy or car industry will pass under foreign control. At a moment when, in every country, the State pretends to affirm its sovereignty France would start a move in the opposite direction. But to assess what are at stakes, it is necessary to understand the challenges and not to be naïve.

The government, as an argument to support the last Alstom French activities takeover by Siemens, has invoked the risks generated by  Chinese competition and the threats the New Silk Roads program were carrying on our industry. Last week, Siemens CEO, whose company employs 38 000 persons in China and has there a more than 8 billion euro turnover, was participating to the Development Forum in Beijing along with the heads of several major industrial German groups (BASF, Thyssen-Krupp, Mercedes, Bosch notably), but without any important French one. He concluded a strategic partnership with Chinese authorities to participate in the transport and energy sectors, to that program, in a spectacular contradiction with the analysis made by the French authorities.

Whatever is concerned, economic policy, public finance management or industrial policy, France needs to make some progress. Old receipts, as the supply-side policy, are not automatically delivering results. Financial markets are not anymore functioning as ten years ago and definitely not as thirty years ago. The choice of industrial alliances must be driven by the analysis of real international situations and the technological challenges and not by ideological presupposed. To ignore these elementary principles drive to failures.


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