In order to improve any financial situation during a crisis, there are really only two options (see below). But, in the case of France, it is of course somewhat more complex. I have lived over 25 years abroad, a personal choice, and witnessed several financial crises from different angles. Working for banks, some of which experienced serious difficulties, I saw different business models being implemented, each of them with its own strengths and weaknesses. This humble write up/analysis is a recap of where we are in France at the moment and what should be done in order to get out of this crisis.
1. You need to increase your revenues – How?
- Raise taxes: More increases seem pretty much impossible and VAT is not really an option at this stage. The 75% tax on revenues above € 1M was an interesting political tactic for the election campaign but was actually found to be illegal by the ‘’Conseil Constitutionnel’’. At this stage, I would tend to agree (in line with various comments) that abandoning this route could actually be an honorable exit for the President. Unfortunately, and from a personal experience, I also would like to add that this has not strengthened France’s reputation around the world, including our major Economic partners.
- Positive growth: That does not seem to fit the picture as the battle is either between .8% i.e. the government point of view or around .4% or less according to the IMF. Of course both could be wrong but it is unlikely to get close to 1%…and so will not be sufficient to pull the economy out of the hole.
- Improve competitiveness: Two recent decisions are going in the right direction but do not seem to be drastic enough to give the shock required to the system and for France to hope catching with its peers.
- The ‘’Gallois report’’. The €20Bn tax credit initiative is positive but €10Bn short of the size recommended and might event be in danger of not being financed with among others the required success of the government €10Bn cost savings plan
- The employment agreement ‘’Work program’’ an encouraging agreement but with the following missing ingredients:
- Two of the unions did not sign this agreement
- The employment flexibility clause is very much opened to interpretation
- The ‘’ flex security’’ clause i.e. recruitments and layoffs ‘’ is mostly non-existent.
- It needs to be ratified by the parliament, although this should not be a major problem because of the current majority.
- Labor costs are too high.
- Reform the 35 hours working hours (RTT). The original benefit aimed at lowering unemployment has not been conclusive. Furthermore the RTT days i.e. the option to translate the overtime into extra paid days of leave, which may add up to 15 days extra annual holidays, cannot be really economically viable in a time where France needs to improve its competitiveness.
- Pray and hope that a miracle will happen, including Germany becoming more flexible as regards European budget rules. Well the odds of that are similar to winning the lotto so…..Not impossible but I would not rely too much on this
As a first conclusion, there is not much that can be done on the revenue front besides addressing the issue of competitiveness for which some positive steps have been taken but would that be sufficient and would it come fast enough?
So let us look at the other side of the equation i.e. Expenses
2. You need to cut your costs – How to reduce expenses?
Reduce the State expenses i.e. The State, Health services, Education and other…is a complex issue and really should be analyzed in two parts:
A. The main expenses, representing about 95% of the state expenses with:
- Staff costs ≈ 31% made off salaries, pensions and social charges.
- State contributions ≈40% (Intervention or “aides sociales”), which include grants to Agriculture, various associations, local authorities and cultural events, but also social grants like assistance to the disabled or housing.
- Operating expenses ≈14.5%. This category includes the costs of running government services (procurement, property management, maintenance costs, etc.), but also subsidies for public services paid by the State to the various operators of public policies (universities, public service employment … )
- Cost of the state debt ≈13%
B. What can we do about these expenses? For sake of simplicity, let’s comment from the bottom upward:
Point (4) is mostly historical and is dictated by the market. Here, France benefits from low interest rates and the perception by investors that it is still a safe risk. France needs to reduce its debt but at the same time needs to finance its deficit, and it is ok, as long as interest rates stay low and investor perception remains positive. However, this is a dangerous situation as the market perception could change quickly and the cost of the debt could rapidly rise beyond acceptable levels
Point (3) is being addressed, in line with previous governments, and it will take times to see if such initiatives succeed but the main question remains: Would it really be successfully implemented?
Points (1) and (2) are the real issues and so let us start with:
Staff costs (1). This is now ‘’dangerous territory’’ as we enter the world of the civil servants, their numbers, their costs and of course ‘’Les Acquis” or badly translated their “existing social gains”, a terrible French disease. Reducing these existing benefits and privileges is something that many French Presidents have committed to do in the past but have failed to push through in the face of the negative popular reaction and subsequent large strikes. (Well if civil servants represent 20% of the work force, together with their families they have significant voting power, which cannot be ignored). After over 25 years in the UK, I sometimes wish that Mrs. Thatcher would have been French and elected as President. Of course, not all was perfect under her leadership, but she stood her ground and never surrendered to the pressure as reforms were implemented, sometimes forcefully. This is something that no French presidents have been able to achieve during the last 30 years.
The Civil servants and the facts: In France there are more than 5 Million civil servants or 20% of the total working force, which ranks France as the top among Europeans. This coupled with their very favorable benefits (see below) translates into very high costs, which France needs to reform if they really want to win the battle of competitiveness.
- Job security: Civil servants have a job for life. In other words, if you recruit a new young civil servant, the cost to the state will continue until his or her death
- Remuneration: Various analysis show that the public sector is on average, better paid that the private sector and sees higher annual increases than in the private sector.
- Working hours: Again various analysis including the respected Eurostat show that the public sector, on average, works fewer hours than the private sector and on top of this benefits of at least one more week of holidays.
- Housing: A large number of civil servants are provided with free housing and the tax benefits associated with it.
- Child allowances: a more generous financial benefit than in the private sector, which often includes special financial help for childcare.
- Health-care coverage: again a more generous benefit than in the private sector.
5 Pensions: Very generous state pensions calculations where, on average, civil servants may get about 75% of their last 6-month wages (including a traditional boost up promotion before retirement). In comparison, the public sector may get about 50% of their best 25 years and with a different base of calculation. In addition and on average, public sector will retire earlier, a situation, which we cannot afford anymore.
6 The Benefits of ‘’Committe d’Entreprise’’, which are significantly more generous in the public sector than in the private sector. (As a reminder French corporations are forced to contribute on an annual basis to an employee fund a percentage of their total salary pool or of their turnover. The funds is used to provide substantial benefits to the employees)
7 The civil servant’s work mentality. Again various analysis seem to indicate that in the public sector the absenteeism is larger than in the private sector, mostly encouraged by more generous sick leave benefits. This is an issue, which is directly correlated with poor management and control. Again initiatives on this subject are being discussed but implementation will face tough resistance, as it did in the past.
As a second conclusion, this is where the government (any government) really needs to focus and implement powerful and strong reform, and where substantial savings can be achieved together with a change of mentality. This will have without any doubt political consequences but unless we have a government or a President prepared to fight for this, then France will not change and the downhill trend will continue.
France is in a difficult situation and 2013 will be another difficult year and it is now time to make some courageous decisions, to improve France competitiveness and ensure that the next generation will not be hit by the mistakes that we again did not address.
Recommendations on an economic point of view
- Improve competitiveness mostly through work flexibility: It requires a shock therapy and the first decisions seem to fall short.
- Unified and increased retirement age to reflect both the economic situation and longer life expectancy.
- Reform the civil servant system and its benefits, and brings it in line with the private sector. Let us have one category of French workers.
- Implement a low tax rate so that more people pay tax and instead of 75% tax for the super-rich, just create a temporary tax rate around 50%.
- Implement ,cross the border, tax deducted at source
Recommendations on a more structural point of view
- Cancel the 35 hours week and bring the French back to work.
- Reform unions and implement a system similar to Germany where unions work with the company rather than just against it.
- Force local authorities to reduce their hiring numbers and control costs.
All of the above recommendations are well known and we have seen their success in places like Canada and some of the Nordic countries. However, it takes serious political courage to implement it forcefully and particularly the reform of the civil servant system. France is running out of time and cannot afford to wait. Now that the risk of a Eurozone breakup, the fiscal issue in the US and the hard landing in China are somewhat receding, it would not take much for the financial markets to change its perception on France risk. Should this happen,….. it might not get pretty.
 Input from Agefi, The Economist, Le Figaro & journalist: M P Grondahl