Economy and Trade
France has the fifth-largest economy in the world and a very strong base of successful multinationals. The commanding heights of the economy have, in recent decades, been shifting from the public to the private sector, with the government disposing of stakes in Air France, France Telecom, Renault, and Thales. However, the government was criticized for displaying “economic nationalism” when in 2006 it named 11 sectors as “critical to the national interest.” GDP growth has lagged behind that of other developed countries, averaging 1.9% from 2002 to 2007. However, the downturn is also expected to be less severe than in faster-growing economies. According to the OECD, public sector spending accounted for 52.4% of GDP in 2007, compared with 44.4% in the United Kingdom and 37.4% in the United States. With 75 million foreign tourists per year, France is the most-visited country in the world and has the third-largest income from tourism. Agriculture comprises 2% of GDP, industry 21%, and services 77%. The country was a founder member of the European Union and of the Eurozone.
Economic Policy over 12 Months
France’s economy was in the throes of a painful transition from being heavily state-owned and controlled to becoming more free-market-oriented when the financial crisis intervened in 2008.
President Nicholas Sarkozy, who entered the Elysée in May 2007, pledged that he would break with the outmoded ideas and behaviors of the past, and promised to implement radical economic reform.
Initially, Sarkozy lived up to the promise, introducing reforms of the pension system, culling civil service jobs, and dismantling the country’s 35-hour week. However, he found it impossible to push through other planned reforms because of the constraints of Eurozone membership, and widespread demonstrations and strikes by aggrieved trade unionists.
Even though most French banks have avoided catastrophic losses, France introduced a €21 billion bailout package for its banking sector in October 2008. Participating banks were required to boost lending by 3%, curb executive pay, and ban some severance payments. Finance minister, Christine Lagarde, unveiled a second bailout package three months later, worth a further €10.5 billion. This had more conditions attached than the first, including a requirement that participating banks should limit shareholder dividends and scrap bonuses.
The government also announced a separate €26.5 billion economic stimulus package in January 2009, mainly focused on infrastructure investment—including upgrading the national electricity grid, the Paris Metro, and SNCF railways. Fifty cathedrals are also due to be renovated.
However, Sarkozy has no intention of trying to jumpstart consumer spending through a reduction in value-added tax. He has slammed the United Kingdom government’s introduction of such a scheme, saying: “It is plain to see that has brought absolutely no progress.”
In February 2009, Sarkozy also unveiled a €6 billion bailout for the ailing carmakers, PSA and Renault, which have seen sales plummet as a result of the global downturn. In exchange for soft loans from the government, the carmakers pledged not to close factories in France and to use only French suppliers. However, the move has attracted criticism for being protectionist from other European countries and is being investigated by the European Commission.
France’s fiscal deficit was estimated at 3.2% in 2008, just over the Eurozone’s 3% limit. However, in February 2009 a minister admitted the shortfall was on course to increase to more than 4.4% in 2009. On 28 January 2009, some 2.5 million people marched across France’s major cities as unions coordinated a mass campaign to persuade Sarkozy to increase wages rather than fund bank bailouts.
Economic Performance over 12 Months
Christine Lagarde, France’s finance minister, said in August 2008 that it was “out of the question to talk of recession.” However, by February 2009 she had admitted that France would follow neighboring countries into recession in 2009.
In 2008, the country’s GDP grew by 0.7%, according to the European Commission, but Lagarde said she expects 2009 to be a “difficult” year, during which the economy will probably shrink by more than 1%. The IMF forecasts negative growth of 1% over both 2009 and 2010—half the contraction predicted for Germany and the United Kingdom. The European Commission is gloomier, expecting a contraction of 1.8% in 2009.
The official statistics office said in February 2009 that GDP shrank by 1.2% in the fourth quarter. Lagarde said: “All the countries of the Eurozone will be at about minus 2%” growth this year, adding: “We shouldn’t have any illusions.” She said the final quarter of 2008 had been marked by an “unheard-of collapse in industrial production.”
Unemployment is expected to rise from its 2008 level of 7.8%. The number of jobless soared by 90,200 to 2.2 million in January, the biggest monthly increase since records began. This pushed the unemployment figure to more than 8%. The European Commission expects unemployment to rise to 9.8% in 2009 and 10.6% in 2010.
The stimulus packages will exert pressure on the government’s finances in both 2009 and 2010. After averaging 2.9% of GDP in 2008, the fiscal deficit is expected to rise to 5% of GDP in 2009 and 5.4% in 2010, before starting to fall. This will be well above the 3% threshold set by the Stability and Growth Pact. However, economists do not believe that the overshoot will prevent the government from using fiscal policy to support the economy.
One reason for the relative robustness of the French economy is the strength of its public sector. An article published in the Wall Street Journal in February 2009 said that the country’s long-term resistance to textbook free-market economics is enabling it to the weather the storm better than more laissez-faire countries. According to the OECD, France has 91 public jobs for every 1,000 inhabitants, compared with 49 in Germany.
Largely as a result of lower energy prices and the slowing economy, inflation has fallen from a peak of 3.6% in July 2008 to 0.8% in January 2009—its lowest rate in more than nine years. Forecasters predict inflation will have tumbled to near zero by mid-2009.
Support for Inward Investment and Imports
The Invest in France Agency provides free and confidential advice to companies wishing to invest in France throughout the investment process, and serves as a central port of call, working closely with all 22 French regions to provide legal and tax advice and assistance. Once a project is underway, the agency offers follow-up services to ensure that inward investors are able to resolve unforeseen challenges. It sees this “after-care” service as a top priority. France can provide regional subsidies for investment in productive industries in regions that are underdeveloped or undergoing industrial restructuring in line with a specific map approved by the European Union.
Business tax—a local tax levied on business activities—can be reduced or waived for periods of five years for industrial companies, and companies in the fields of science and technology. In regional zones, grants can be awarded for up to 15% of the total investment for large companies (grants of 25% are available for small companies). Business tax and property tax are adapted to the zone where the business is located, in order to attract investors. The Prime d’Aménagement du Territoire is a regional development grant of €15,000 per job created.
GDP growth: 0.7% (2008, est., European Commission)
GDP per capita: US$32,700 (2008, est.)
CPI: 0.8% (January 2009, government figures)
Key interest rate: 2% (February 2009) Eurozone
Exchange rate: euro per US dollar—0.6494 (2008, est.)
Unemployment: 7.8% (2008, est., European Commission)
FDI: US$1.08 trillion (2008, est.)
Current account deficit/surplus −US$47.27bn (2008, est.)
Population: 64.06m (July 2008, est.)
Source: CIA World Factbook except where stated