France needs to boost competition, tackle debt and labor issues
| Author | Werner Schule/Luc Everaert |
| Position | IMF European Department |
| Pages | 46-47 |
Page 46
The French economy's performance over the past few years has surprised many observers, who felt that inflexible labor and product markets and the perceived tendency of government officials to engage in "economic patriotism" would have hobbled progress. But they did not.
Behind the appearances and the rhetoric, the French economy has been changing more than is commonly perceived.
The French economy has been performing well (see table). GDP per capita growth has been higher than other countries in the euro area and growth overall has exceeded the euro area average. But the difference seems to be evaporating and, globally, France's position has deteriorated substantially.
Although France has accomplished much, it must tackle many more problems to eliminate the drag on growth.
Domestic demand has driven France's economic expansion. Wage increases, employment gains, and low interest rates have supported consumption growth and bolstered the housing market. Fixed capital formation has revived with sales expectations, although profit margins have declined because wages did not moderate enough to offset the higher prices of inputs. Generous dividend payouts and higher tax obligations have further reduced company savings, but low interest rates have encouraged external financing of investment. Despite healthy global demand and the cyclical recovery in Europe, net exports have subtracted significantly from growth since 2002, and wage costs have been rising faster in France than in some of its neighbors.
Current demographic trends and ongoing structural reforms suggest that potential growth (that is, in the absence of shocks) could be higher than previously estimated. Recent fertility rates and immigration numbers suggest that the labor force will grow into the next decade. The authorities estimate that the reforms in goods and services markets implemented between 1998 and 2006 could add 0.1-0.2 percent to potential growth over the medium term, and they see some evidence that the secular decline in total factor productivity growth has ended. Together with the effects of the recent uptick in investment, this suggests that annual potential growth could temporarily rise to 2¼-2½ percent before, in the absence of further reforms, settling at somewhat less than 2 percent a year in the long run.
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