Here’s something you might not expect to read: ‘chapeau’ to the French economy, which has been one of Europe’s star performers since the pandemic. But what, if anything, can we in the UK learn from this?
First, some numbers. The French economy has bounced back relatively quickly. GDP was about one per cent higher in the fourth quarter of last year compared to the same period of 2019, before Covid struck.
In contrast, GDP in the UK was still 0.1 per cent lower, in Italy about half a per cent lower, with even bigger shortfalls in Germany (one per cent) and Spain (four per cent).
France has also done relatively well on inflation. French consumer prices rose by 4.2 per cent in the 12 months to February, the smallest increase in the EU. UK CPI inflation that month was already 6.2 per cent.
These differences appear to be genuine, rather than statistical quirks. In particular, France and the UK have measured the impact of the pandemic on the output of the public sector in similar ways.
So, how has France pulled this off? The US economist Paul Krugman has heralded the French outperformance as an example of the benefits of high levels of state intervention. He has a point, though not a strong one.
The unusual nature of pandemic, when so much of the market economy was shut down, was always likely to flatter countries like France (or China) where the state was already dominant. Even in 2019, French government spending was more than 55 per cent of national income, the highest in Europe, compared to around 40 per cent in the UK.
The pandemic also played to the strengths of the French civil service, which is dominated by a technocratic elite from the Ecole Nationale d’Administration and leading business schools. Public officials and private executives come from similar backgrounds, often moving smoothly between the two sectors. Dominic Cummings might have had fewer problems getting things done if he had worked at the Elysee, rather than No. 10.
However, there are some big caveats. For a start, it is a bit odd for US Francophiles, like Krugman, to hold up France as an example that the US should follow, when the economic recovery in the US has been even stronger. (US GDP was more than three per cent higher in the fourth quarter of last year than its pre-Covid level.)
France has done better than the US on employment. But so have many other countries – including the UK, Germany, and Australia – which chose to protect jobs with furlough schemes rather than just top up the benefits paid to the unemployed. There is nothing particularly Gallic here.
More importantly, what works a little better during a once-in-a-generation crisis is not necessarily the best model in more normal times. Here, the problems of the French approach are much clearer.
One is persistently high rates of unemployment, particularly among young people. French productivity appears to be good partly because only the most productive people are able to find work.
Another is that the heavy burden of tax and regulation deters global companies from investing in France, and makes life particularly difficult for small and medium-sized enterprises. A handful of big firms thrive, but many French commentators look enviously at Germany’s Mittelstand, or the UK’s strengths in FinTech.
The French public finances are also in worse shape, and will get much worse as the population ages. The government looks set to keep spending more than half of national income for the foreseeable future, with debt well above 100 per cent of GDP. Membership of the euro means that France has lost the flexibility provided by having your own national currency and an independent central bank.
The ways in which France has kept inflation down are problematic too. The French government has chosen to transfer almost all the burden of higher energy costs from households and businesses to taxpayers and shareholders in energy companies (itself included).
This short-term fix has been popular (this is, after all, a Presidential election year). But a policy of shielding everyone from higher prices, regardless of ability to pay, is also very expensive and prevents markets from working properly.
Many commentators have also raised concerns over the willingness of the French government to exploit state-controlled companies for political purposes, even when these companies are partially privatised.
Above all, the French themselves now recognise at least some of these problems. Presidents Hollande and Sarkozy attempted pro-market reforms, without getting far. But President Macron has made more progress in modernising the pensions and benefits system, reducing the burden of regulation, and lowering corporate taxes.
Ironically, then, the French economy had benefited from a shift towards more ‘Anglo-Saxon’ capitalism, and away from socialism ‘with French characteristics’. Partly as a result, business investment has rebounded strongly in France, while it is still more than 10 per cent below its pre-Covid level in the UK.
Our economy should catch up and surpass France again in 2022. The UK is now leading the way out of the pandemic. Both investment and trade should benefit from the easing of Covid and Brexit uncertainties. The British economy is also less directly exposed to the fallout from the Russian invasion of Ukraine.
Nonetheless, the fact that France has been able to steal a march should be a warning to the Chancellor. If even France is now getting its act together, the UK’s traditional credentials as a far more friendly place to do business cannot be taken for granted. Believe it or not, the Tories could learn a thing or two from Macron’s tax cutting and nibbling away at red tape.
Rishi Sunak’s recent Mais Lecture and the better bits of the Spring Statement show that he is well aware of these challenges. The question is whether he will be able to close the chasm between rhetoric and reality. As the French might say, ‘bonne chance!’.