France

• Author: Werner Schule
• Pages: 6-7

Page 6

The recovery in French trend growth in the 1990s resulted mostly from capital deepening and an increase in structural employment, as has been pointed out by Nadal de Simone (2003). Total factor productivity growth, however, declined from an average of 2 percent per year during the 1980s to 1.2 percent during the 1990s (Everaert and Nadal de Simone, 2003). Capital deepening was due to investment in new technologies. With the notable exception of computers and software, however, labor-saving investment decelerated sharply during the 1990s (Estevão and Levy, 2000).

Despite a gradual decline in the nonaccelerating inflation rate of unemployment, the French economy was nearing its potential at the beginning of this decade (Ubide-Querol, 2000). However, given the high degree of synchronization between the French cycle and that of the rest of the world (Nadal de Simone, 2002), GDP growth was affected by the global downturn in 2001-02. Furthermore, inflation persisted due to idiosyncratic factors and higher-than-expected labor costs following introduction of the 35-hour work week (Weisfeld, 2002; Nadal de Simone, forthcoming). In stark contrast to Germany, the subsequent recovery in France was entirely driven by domestic demand, including private consumption. While French consumption closely tracks households' disposable income, financial wealth effects are smaller than in the United States, and housing wealth does not seem to have a measurable impact (Schule, 2004). Limited wealth effects may explain why France did not experience a significant decline in the private household savings rate.

On the external side, France's trade balance moved into deficit in 2004, after net trade contributed negatively to GDP growth for the third year in a row. This happened against a backdrop of booming world trade, sluggish demand within the euro area, and continued appreciation of the euro. Allard (forthcoming) looks at the divergent export performances of France, Germany, the United Kingdom, and Italy and finds that French export weakness relates to regional and product specialization, relative cyclical positions, and price and cost competitiveness.

France's strong employment performance in the second half of the 1990s can be partly explained by labor market policies. Estevão (2003) finds that direct subsidies for job creation are the most effective labor market policies to raise employment rates, while expenditures on training programs seem to be...