The French Economy: A Pyrrhic Victory

The creation of the euro has been a pivotal moment for France, marking the culmination of a decade and a half of economic planning. However, this success has come at a significant cost, with the French economy struggling to create employment and facing profound structural rigidities. The reduction in inflation, from 11.7 per cent in 1982 to 0.3 per cent in 1998, has been accompanied by a decline in real economic growth, from an average of 5.5 per cent in the 1960s to a mere 1.5 per cent in the 1990s. Unemployment has risen to over 11 per cent, with many workers employed in subsidised job-creation schemes. The Organisation for Economic Co-operation and Development (OECD) estimates that the structural rate of unemployment is 10 per cent, suggesting that the French economy has a long way to go before it regains its former vitality.

Key Takeaways:

• The French economy's performance has been hampered by structural rigidities, with shares of wages in value added lower than at any time in the past three decades.
• Wage moderation, with an average nominal increase in wages of 2.6 per cent, over the past five years, has been accompanied by a strong competitive position, with a current account surplus of 2.5 per cent of GDP.
• The European Central Bank's easy monetary policy has enabled growth to increase, with the OECD predicting 2-3 per cent growth in 1999, but the structural rate of unemployment remains high.
• The French government has made some improvements in labour market liberalisation but must go much further to tackle the challenge of labour market flexibility.
• The adoption of the euro has accelerated the opening of the financial system, but this also demands liberalisation of the labour market, a challenge that the French government finds difficult.

Statistics:

• Inflation rate in France: 11.7 per cent in 1982, 2.8 per cent in 1990, and 0.3 per cent in 1998.
• Real economic growth in France: 5.5 per cent in the 1960s, 2.25 per cent in the 1980s, and 1.5 per cent in the 1990s.
• Unemployment rate in France: 4 per cent of the labour force in the 1970s, 9 per cent in the 1980s, and 11.5 per cent in the 1990s.
• Shares of wages in value added in France: lower than at any time in the past three decades.
• Current account surplus in France: 2.5 per cent of GDP.
• General government structural fiscal deficit in France: 2.1 per cent of GDP in 1998.

Sources:

• Financial Times, Copyright Financial Times Limited 1999. All Rights Reserved.
• Organisation for Economic Co-operation and Development (OECD)
• European Central Bank
• French government reports and data