A report from the European Commission suggests that France (see here ) has lost a large part of its capacity to react and to adapt its behavior to an adverse environment. In other words, when the situation changes rapidly the French economy is not able to give an efficient and immediate answer.
This means that even if the global environment is getting better, the French economy will not be able to take advantage of it by adapting its behavior. This reflects a lack of competitiveness and a productivity that is growing at a pace that is too slow.
Competitiveness issue can be seen on the first chart. External balance is negative since 2005 with a deepening from 2008 on. The problem is not that it is between 2 or 3 % of GDP, it comes from the fact that it is in this range every year since 2008. In other words, exports are not competitive enough to balance imports. We have to keep in mind that the main reason for exports is to buy what cannot produce by domestic companies. If it’s not manageable then it means that exports lacks of competitiveness (the difference between cost and non cost competitiveness comes after).
Productivity is on a downside trend as it can be seen on the second chart. I’ve taken 5 year growth in order to limit short term volatility. In Q4 2012, the last point available, trend productivity growth is 0%. It’s important as productivity growth will create a surplus that will make extra revenues for employees and for shareholders. If productivity growth is zero there is nothing else to share. Productivity will grow through productive investment. On chart 3 we see that investment is not strong, still lower in level than before the crisis. The lack of investment cannot reverse downside productivity trend.
The main issue is investment and to be able to invest companies must be able to foresee and to extend their economic horizon. That’s why the current discussions on austerity policies are important especially after the controversy between public debt level and growth (see here). Austerity policies lead to low or negative growth and this cannot imply a stronger sequence of investment.
At the same time, there is another source of uncertainty linked to euro area institutions. When institutions are perceived as too weak and may be risky (in the Euro Area it was Euro Area dismantling at least for a part), this increases uncertainty. That can reduce incentive to invest. Since summer 2012, the Euro Area wants to change institutions with the creation of the European Stability Mechanism, the adoption of the Treaty on governance, the new role for the ECB as lender of last resort under certain conditions. This framework is perceived as consistent. This means that going quickly in building these institutions can help to exit this period of low growth. Nevertheless we see that it’s not easy as Wolfgang Schauble wants to delay the Banking Union creation. He thinks that European Treaties have to be changed. All this take time and increase uncertainty. That’s not positive for the economic outlook.
To be convinced by the role of investment to improve growth prospects read this paper by Laurence Boone ( see Here)
Looking specifically at the French companies’ situation we have also to mention an issue on added value distribution. The margin rate which was almost stable between 1990 and 2008 dropped dramatically during the recession. Its current level is comparable to the level seen at the beginning of the 80’s. This doesn’t give important capacity to fund investment.
The main reason of this drop is that in late 2008 economic activity was rapidly lower after the Lehman bankruptcy shock but at the same time wage costs were on an upside trend that was not affected by the shock. Margin level was rapidly lower and the picture has not changed since. This leads to discussions on wage dynamics when the environment changes. This tough question was discussed recently and a law has just passed at the National Assembly to try to improve this issue by allowing more flexibility. On another aspect, the government has decided to make a tax credit (Crédit Impôt Productivité et Emploi) in order to allow companies to get higher margin (EUR 20bn). But to be efficient this last measure must be permanent. This means that it is necessary to create a kind of endogenous adjustment to permanently change the added value distribution.
The EC report says in fact that France lacks of capacity to adapt at a new environment. This improvement needs more investment and a more flexible framework. The first measures from the government are on the good direction but everyone has to be convinced that change will be a permanent situation and that the capacity to adapt rapidly is now mandatory in a global economy.