President Macron’s biggest challenge is to make the nation dynamic again.
Two measures highlight the seriousness of the economic challenge facing France’s new president, Emmanuel Macron, who was inaugurated Sunday. The first is the current growth trend. Before 2008, France and the euro zone had similar growth rates; now France lags the euro zone trend growth rate of 1.6 percent. From 2013 the French economy grew just 1 percent on average, compared to 2 percent before the 2008 crisis.
The other indicator is per capita income. France’s per capita income finally returned to pre-crisis levels only in 2016. Compare that to Germany, which hit that level in 2010, Japan in 2013, the U.S. in 2014 and the United Kingdom in 2015. This persistent lack of growth has been a major source of support for populist candidates and especially Marine Le Pen’s National Front.
What is clear is that France’s economy has become much less able to recover from an economic downturn than it once was. After the last two recessions — the first oil shock in 1974-1975 and the European Monetary System crisis in 1992-1993 — France bounced back quickly, as the chart below shows.
The current period is different for several reasons. Part of the problem is that austerity policies, put in place since 2011, triggered uncertainty and limited demand in the manufacturing sector. Companies invested less in the period since the crisis, hence weakening growth momentum.
France’s sluggish recovery has had disastrous consequences for public finances, with French debt now close to 100 percent of GDP. It has also prolonged the country’s unemployment problem, with youth unemployment now at around 25 percent.
So what’s happening here? In general, growth can be held back either by low levels of productivity or insufficient hours worked. But on productivity measures, France has always done well. According to OECD data, France’s productivity level is while above the U.S. level. Productivity growth has declined since the 2008 crisis, but it has done so in most other advanced economies as well. Starting from 2007, the productivity profile for France looks similar to those seen in Germany, in the U.S. or in Japan. In other words, the growth difference doesn’t arise from a gap in productivity.
A more likely culprit is the labor market. Everywhere, from Germany to Spain to Italy, the number of hours worked has surged recently as overall economic activity picked up. In the United Kingdom, the recent acceleration of GDP per capita was due largely to longer working hours, not on a surge in productivity. The sole exception is France where there has been no increase in labor activity.
France’s rigid labor market may provide a cushion when there is a negative shock, since dismissing workers is difficult and expensive for companies. But it’s a problem when the economy is growing as companies fail to adjust quickly enough to rising demand.