Stockholm School of Economics
“France, Europe: Separating facts from fiction”
Monday 25 March 2013
Ladies and Gentlemen,
I would like to thank you for inviting me to talk about reform efforts in France, which in fact are directly connected with this official visit to Sweden. This is not a mere courtesy call, but rather a serious visit that is very much a part of our reform initiatives, and one of the most important reforms in particular: reform of the government itself. On this trip, I am accompanied by a delegation that includes ministers, MPs and government representatives. We are here to discuss reforms that Sweden has carried out over the past two decades, and to benefit from your experience as we implement our own reforms.
France is the second largest economic power in Europe, and the fifth largest in the world, two positions we have every intention of retaining.
Government reform is only one of the large-scale structural reforms that we have pursued since the elections nearly one year ago. I will mention others today as well, which may run counter to certain shared ideas. Sometimes, it is difficult to perceive change from a distance. And yet, France is changing – in a moment, I will explain how. But first, let me say a word about the general direction our efforts are taking. France is the second largest economic power in Europe, and the fifth largest in the world, two positions we have every intention of retaining. This goal is within our reach, if we can successfully complete reforms that the country has postponed for so long. It is the responsibility of the current government to do so, and it is exactly what we are doing.
There are four cornerstones to our economic policy: first, setting our budgetary house in order; our public accounts have been in disarray for more than thirty years and are jeopardising our future. Next is restoring the competitiveness of the French economy, which has suffered badly over the past decade, and I will share with you the solutions we have chosen. Third, we are implementing major structural reforms, which are also critical for restoring France’s long-term competitiveness. I am referring in particular to labour market reforms, but we are carrying out others as well. The final cornerstone involves stabilising the euro area and fostering its recovery – an area to which I am devoting a large part of my time. All in all, we are pressing ahead very determinedly with our reforms, even though the context in Europe, marked by a significant economic downturn and fiscal consolidation efforts in many countries – is much less favourable today.
When I left office in 2002, France enjoyed a trade surplus; currently it has a trade deficit of more than €70 billion.
To give you a better idea of the scale of the task we face, let me say a few words about the situation we found when we arrived in office in May 2012. A few figures will suffice to sum up the macroeconomic situation in France: between 2007 and 2012, average annual growth was exactly 0%. During that same period, public debt grew by €600 billion, while the public deficit exceeded 7% of GDP in 2010, and stood at 5.2% of GDP in 2011. Worse, France’s structural balance has been off-course for several years, but this is not, according to the Government Audit Office, due to the financial crisis. In 2011 it was -4.8% of GDP, and -3.6% in 2012. At the same time, public expenditure rose by 3.7 GDP points. I should also mention that France’s foreign trade balance has been on the decline for ten years, which explains our loss of competitiveness. When I left office in 2002, France enjoyed a trade surplus; currently it has a trade deficit of more than €70 billion. Under the previous government, France added one million names to the unemployment rolls. This was the economic reality with which we were confronted when we took office. It was very serious, and it called for immediate and decisive action.
In response to this, our first action was to set the country’s public accounts in order. France has not voted a balanced budget for thirty years. Previous governments systematically sidestepped the fiscal disciplinary measures imposed by the EU – the very measures France had voted for. For an entire decade, the country allowed its deficit to deepen, which damaged its credibility amongst its European partners and on the financial markets.
My government has decided to put our country’s public finances in order, for the sake of France itself, because we feel that this is one of the prerequisites to getting the French economy back on track.
This situation is unacceptable. It must change, and it is already changing. We are no longer in 2002. My government has decided to put our country’s public finances in order, for the sake of France itself, because we feel that this is one of the prerequisites to getting the French economy back on track.
First, our objectives: a balanced budget by the end of the current president’s term in 2017. François Hollande made this promise during his campaign for the presidency, and he will keep it. Let’s be clear – a balanced budget has never been one of France’s traditional economic policy priorities. This is a mistake; part of my job, and the job of the French government, is to explain this to our citizens. A country in debt is an impoverished country, a country in the hands of the markets. It is a country whose sovereignty is eroding. A country in debt is one that is mortgaging its children’s future. Above all, a country in debt is a country that cannot achieve the margins to pay for public services and the policies it needs to carry out. In France, this is a new way of thinking, but we will not be deterred, because we are aware of our responsibilities. Our fellow citizens understand, but they are calling for heightened vigilance with respect to the speed and the manner in which this fiscal consolidation is carried out. Here is where we are focusing our efforts.
So, where are we now? As I mentioned earlier, when we arrived in office, France’s deficit for 2012 would have, without our corrective efforts, exceeded 5%. Since then, a great deal has been accomplished:
– In our first six months, we promulgated six pieces of financial legislation to adjust the trajectory of France’s accounts. One of these, which transposed the commitments of the Treaty on Stability, Coordination and Governance into national law, provided a thorough overhaul of the governance of our public finances, lending credence to the idea of a balanced budget by 2017.
Our Government Audit Office observed that « an effort of this magnitude had not been made in France since 1994 and 1996 ».
– With respect to 2012, when we arrived in office, we realised we needed an additional €10 billion to achieve the country’s stated objectives. We managed to bring the deficit down to 4.5% of GDP with more than €7 billion in additional levies and €1.5 billion saved by freezing expenditures. The initial results show that spending remained in line with forecasts. Our Government Audit Office observed that « an effort of this magnitude had not been made in France since 1994 and 1996 ».
– Turning to 2013, we have planned major structural efforts. The reality of these efforts is not in doubt; they consist of more than €10 billion in public spending cuts and €20 billion in additional levies. We have made this adjustment without compromising growth. By acting fairly, we have maintained the purchasing power of the lowest-income households, which has allowed France to better weather the crisis. This has been acknowledged by the European Commission, which noted that France’s structural adjustment for 2010-2013 was 4.1 points of GDP, i.e. an average of more than one point GDP per year – exactly in line with France’s commitments to its European partners. Of these 4.1 points, 2.5 points (i.e. nearly two thirds) were achieved in 2012 and 2013, despite a worsening economic situation. This was due to the measures my government adopted over the past several months.
We will not step back from structural reform efforts in 2013 and we are aware that additional reform efforts will be needed in the years to come, starting in 2014.
We have now been in office for ten months. In those ten months, we have clearly demonstrated our commitment to setting our accounts in order. Following the announcement of the European Commission’s forecasts, France’s interest rates remained unchanged. This is because we followed through on our determination to get our house in order. Yes, it is true that we will petition the European Commission to be allowed to postpone bringing our budget deficit back down below 3% until 2014. This will allow the automatic stabilisers to take effect in 2013, at a time when euro area activity is noticeably shrinking. We will not, however, step back from structural reform efforts in 2013 – efforts that are, let me reiterate, unprecedented – and we are aware that additional reform efforts will be needed in the years to come, starting in 2014. We simply want to ensure that the fiscal consolidation effort is appropriately tailored, so as not to affect overly our growth prospects, including over the long run.
The second cornerstone of our economic policy involves restoring the competitiveness of the French economy. Balancing the budget will, of course, play a role in this, if only because it provides better financing conditions for French businesses. But we must do more.
I don’t want to paint too gloomy a picture; France remains an attractive country. There are reasons why it is Europe’s second most powerful economy. Its ratio of Foreign Direct Investment stock to GDP (39%) puts France ahead of the US, Germany and Japan. In Europe, France is the number one destination for foreign investment that creates manufacturing jobs. More than 20,000 foreign-controlled firms operate on French soil, accounting for a third of French exports and 20% of total R&D amongst businesses in France. Paris has more company headquarters than any other city in Europe. France has 32 firms in the top 500 – on par with Germany. It is the number one tourist destination: visitors from around the world contribute their currencies to the French economy. France is the world’s fourth most popular destination for foreign students, behind the US, the UK and Australia. It is also in fourth place in the EU in terms of per-hour labour productivity, behind the three Benelux countries, but ahead of Germany and the UK. When it comes to working hours, despite the jokes about short working weeks in France, the facts speak for themselves: the average working week for managers is 44.6 hours, and it is 36.6 hours for employees, which is above the European average. Total labour costs (including wages, mandatory charges and others) is lower in France than in the US, Germany, the Netherlands or Japan.
On 6 November 2012, my government put forward a major competitiveness « package », which we have dubbed the « National Pact for Growth, Competitiveness and Employment ».
In short, France is still an attractive country, with many solid advantages. But we must reverse the decline in its competitiveness, which has become steeper over the past 10 years. To this end, on 6 November 2012, my government put forward a major competitiveness « package », which we have dubbed the « National Pact for Growth, Competitiveness and Employment ». In France, this Pact was appreciated for what it was: a wide-ranging, ambitious effort to allow French businesses to better compete on an international level. It was welcomed by the various economic stakeholders, who basically asked us to implement it as quickly as possible. It may not have been given its due outside our borders, and I would like to say a word or two about it.
The first of the Pact’s thirty-five measures is an unprecedented reduction of labour costs in France. When the initiative is up and running, this should amount to €20 billion per year. This is a huge figure – it represents 1% of France’s GDP. The goal is to make lower labour costs a catalyst for French businesses to hire and invest. Working with Parliament, I sped up implementation of this measure – which is in fact a Tax Credit – and it is now in place.
The Pact contains thirty-four other measures which, whilst perhaps not being as eye-catching as the reduction in labour costs, are nevertheless vital to help French firms recover their non-price competitiveness. I will briefly mention a few of them and we can come back to this during the Q&A session. There is a “tax stabilisation” driver and the Government’s commitment, during its term of office, to make permanent five tax mechanisms that are essential for investment and business activity. There is a major move towards regulatory streamlining, with the involvement of businesses, so that they can operate in a more flexible and adaptable regulatory environment. We are also providing vital support for innovation by extending the current, and highly advantageous, Research Tax Credit to SMEs and VSEs which were previously ineligible.
To sum up, the Pact contains a full range of measures which should prevent France from “dropping out” and ensure that it remains competitive. In the coming months, I will be devoting much of my time to its implementation and to explaining it to the business world so that it is wholeheartedly embraced.
The third cornerstone of our economic policy is structural reforms to balance the accounts and support competitiveness.
The third cornerstone of our economic policy is structural reforms to balance the accounts and support competitiveness. I will mention only three, but there are many more, and the sheer scale of the job at hand means that it will stretch to the end of our term of office.
I would like to start with pension reform, which is sometimes misunderstood outside France. This misunderstanding is due to distance and this is why I am mentioning it. In respect of this reform, two distinct government initiatives should be mentioned:
– The first was the summer of 2012. Contrary to the perception of certain commentators, the measure introduced at that time did not repeal the 2010 reform and bring the legal retirement age back down from 62 to 60. It was in fact an adjustment aimed specifically at those who began working at a very young age. Around 75,000 people – or about 8% of the annual number of retirees in France – were concerned. For all the others, the 2010 reform remained in place. It was an initiative to ensure fair treatment and it had to be introduced.
– The second landmark for pension reforms is now. After an initial round of appraisals ending in late January, talks have just started under the aegis of a Pension Reform Committee which will put forward avenues for reform based on specifications agreed upon by labour and management. The stakeholders are involved in all the stages. The Committee will submit its conclusions in June 2013 and the French Government will begin discussions with labour and management before making its decisions public prior to the year-end.
The labour market is the subject of the second major structural reform. The French market has one essential shortcoming in that it is overly fragmented. That said, previous attempts at reform have fallen foul of concerns about the erosion of workers’ rights which obviously needs to be avoided. With this in mind, President Hollande has come up with a method which is a first for France even though here in Sweden it may appear perfectly normal. The idea is to focus on social democracy and to task labour and management with jointly tabling balanced changes.
Negotiations reached a successful conclusion on 11 January, materialised by an agreement that bolsters job security, gives workers new rights, more effectively anticipates changes within companies and prevents job losses via negotiated and temporary mechanisms providing guarantees for workers. It also provides staff representatives with extended powers such as the right to sit on the boards of directors of large businesses. For their part, under the agreement, firms are given greater legal certainty and room for manoeuvre as these aspects have been negotiated and better safeguard jobs. The Cabinet has just adopted a bill transcribing this agreement and we are looking to have it passed by Parliament before the summer.
I want to convey the scope and range of this agreement in spite of the fact that, here in Sweden, the method is not as groundbreaking as it is in France. One of my Government’s most resounding successes has been to reform the labour market without conflict or hindrance, with the agreement of all the stakeholders, and by creating a win-win situation for firms and workers.
The third structural reform I would like to mention is “Government Modernisation”. This is the reason for my official visit to Sweden.
The third structural reform I would like to mention is “Government Modernisation”. This is the reason for my official visit to Sweden. I have already mentioned France’s goal of balancing its budget by 2017. With mandatory levies already very high in France, there is a limit to what we can ask of businesses and households. As a result, the entire public sector – central government, local authorities and social security organisations – has to better control its spending. We have elected to balance our books through efforts being made by all stakeholders. These efforts focus more on cutting public spending than on raising taxes. The Government Modernisation policy has to specify how this will be achieved.
The policy has two components, one economic and the other budgetary. The first is in line with our overriding goal of restoring the French economy’s competitiveness. It is an ongoing programme to streamline standards and reduce administrative burdens. Seven streamlining projects have already been chosen for 2013. One example is the rollout of an “SME test” to gauge the possible ramifications of new rules for SMEs. Turning to budgetary matters, the Government Modernisation policy assesses the effectiveness of public spending. Throughout President Hollande’s term, all public policies will be assessed in terms of their effectiveness and, where necessary, the requisite streamlining will be introduced. This project is of major importance and I feel that we should not be afraid to admit that some areas of our public policies are ineffective – meaning that public monies are poorly earmarked. I can give you an example. There are over 7,000 business subsidy schemes in France and we should ask ourselves if they are all comprehensible and effective, or if we would not be better off streamlining the scope of government action.
The final cornerstone of our economic policy, which I will mention briefly but which remains vital, is the stabilisation and recovery of the euro area. Much ground has been covered in recent months and several of the countries under programmes are seeing the light at the end of the tunnel. New instruments have been rolled out. The Member States and the ECB have made unswerving commitments as regards the integrity of the euro area which was the subject of open speculation mere months ago. There is no doubt that the situation in Cyprus has somewhat rekindled the flames but it is seen as a one-off and concerns as to the durability of the euro area have not returned to centre stage.
But the euro area is not out of the woods. What is needed, beside the completion of essential stabilisation efforts, is for the euro area to focus the same energy on its momentum and on reinvigorating its businesses. You all know the figures for the final quarter of 2012: -0.6% in Germany, -0.7% in Spain and -0.6% in the euro area. The Commission has slashed its 2013 outlook for all Member States. It forecasts a continuing recession for the euro area (-0.3% growth) with all the leading Member States being affected. There will be a downturn in Germany (0.5% as against 0.7%), Spain and Italy will remain in deep recession (-1.4% and -1.0% respectively) and France will have very sluggish yet positive growth. This is the task before us.
We need better inter-country coordination and this is down to the leading European countries with France and Germany showing the way.
We need to hold pan-European talks on how to take up the challenge. As I have always said when addressing EU bodies, I believe that sweeping reforms are required – I have mentioned today that France is doing just this – and a climate for recovery and growth needs to be fostered. To achieve this we need better inter-country coordination and this is down to the leading European countries with France and Germany showing the way. Our perceptions of each other need to be based on hard facts rather than stereotypes. There is no denying that for many years France gave insufficient regard to its public accounts, that its competitiveness declined and that it put off reforms on the grounds that they were problematic. That was the case in the past, but look at the situation today, and see if it is still true.
Les images de cette intervention :
Le reportage de France 2 à l’occasion de mon déplacement en Suède :