This article is part of our special report European economy: On the road to recovery or still in stagnation?.
France tends to develop in the opposite direction to the rest of the eurozone and the economic lights are now on green. However, French morale tells a very different story and the international situation raises concerns among economic forecasters. EURACTIV France reports.
In the run-up to the European elections, the economic situation in the eurozone seems to be more cheerful than was the case in 2014. Growth has generally returned and budgetary slippages are but bad memories.
However, the hope generated by Emmanuel Macron’s election in 2017 has run out of steam. This is reflected just as strongly in economic activity as it is in French people’s sense of discontent. According to a survey conducted by BVA and La Tribune, 69% of French people think that the government’s economic policy is wrong.
Discrepancy between France and the rest of the eurozone
Still, the picture is not as bleak as it used to be under previous governments. Admittedly, there has not been the 2% growth promised by the French government for 2018. Instead, it is expected to be limited to 1.6% or 1.7%. The rise in economic activity that began in 2017 weakened this year, as the government’s fiscal policy and train strikes in the spring weighed on consumption.
Consequently, in the first six months of 2018, France recorded a poorer performance than its eurozone neighbours, where the economy grew on average by 2.2% against 0.8% for France.
“The temporal nature of fiscal measures has much to do with the French picture: there were more charges at the beginning of the year, but there will be tax reductions, such as real-estate tax, in the second part of the year, which should boost consumption,” says Charles-Henri Colombier, economy director at Rexecode.
He said that the reforms introduced by Macron – such as those concerning the labour market, capital taxation, education and training – will not have an effect before the end of the President’s five-year term.
During the second half of 2018, reductions in residence tax and general social contribution will restore purchasing power.
Less tax, more growth: towards reversing the trend
The overall picture will be reversed during the second half of the year and in 2019. Several indicators are turning green for France, which could fare better than the other eurozone countries.
“I envisage a strong rise in purchasing power, or 2% in 2019, with more moderate inflation. Logically, this should renew growth if consumer morale rises again. This is what we need to monitor; without improved consumer morale, the recovery of consumption will probably not be as strong,” warned Hélène Baudchon, an economist at BNP Paribas.
Over 2019, French people will pay less taxes overall, which is a rare occurrence and could stimulate a rise in consumption. The gradually falling unemployment rate should also help to reassure French people, who tend to save more money when they are worried about their jobs.
Nevertheless, uncertainties remain due to the increase in oil prices, which do not seem likely to ease, and increases in indirect taxes on tobacco and fuels. These are factors which are likely to reduce purchasing power, while filling public funds, but without having an effect on consumption and overall growth.
Italy and international trade: two doubts for 2019
In the medium term, Baudchon questions France’s deficit-reduction targets: the government has promised to reduce public spending by 4 points by 2022. Yet, it is failing in this respect at the moment, which suggests serious years of scarcity are to come in 2020, 2021 and 2022.
However, it is the international situation in particular which runs the risk of stemming the positive French momentum. This is all the more so given that France retains a major basic problem, which is its trade imbalance. Its exports’ lack of competitiveness accentuates the trade imbalance a little further every year, whereas many of its European neighbours are seeing their surpluses swell. This situation is explained by the costs of French labour as well as taxes on labour and production. The tax credit for competitiveness and employment has attempted to respond to this situation, with little success for the time being.
“We are monitoring what is happening in Italy especially. The European elections could notably increase the number of populists at the European Parliament. But the real risk is that that countries like Italy block the progress of European construction, and that’s already the case, whatever the outcome of the elections,” Colombier considered.
While the heads of state have planned to look into eurozone adjustments at a summit in December which will aim to complete the banking union and to review the European stability mechanism, others are concerned about the zone’s resilience in the event of a new financial crisis.
The window of opportunity to adopt the last necessary texts to consolidate the system’s stability will be short (between January and March), as the European elections campaign will mark a long period of legislative scarcity.
Over the medium term, it is rather an increase in interest rates which could threaten the French economic situation and the EU’s stability. Any hike in interest rates will place a heavy burden on the French budget, given that French debt represents 100% of its GDP. Moreover, the consequences of such a rise for Italy, whose debt is even higher at 130% of its annual output, could risk plunging the eurozone into a new ‘Greek’ crisis.