The France that I see as I look out from the bullet train today is far different from the France I see when I survey the economic data. Going from Marseilles to Paris, the countryside is magnificent. The farms are laid out as if by a landscape artist – this is not the hurly-burly no-nonsense look of the Texas landscape. The mountains and forests that we glide through are glorious. It is a weekend of special music all over France, and last night in Marseilles the stages were alive and the crowds out in force. The French people smile and graciously correct my pidgin attempts at speaking French. I have found it diplomatic not to mention that I think France is in for a very difficult future. Why spoil the party?
But for you, gentle reader, I will survey the economic landscape that I see on my computer screen. It shows a far different France from the one outside my window, one that resembles its peripheral southern neighbors far more than its neighbors to the north and east. The picture is not all bad, of course. There is always much to admire and love about France. But there are a lot of hard political choices to be made and much reform to be undertaken if this beautiful country is to remain La Belle France and not become the sick man of Europe. This week, in what I think will be a short letter, we'll look at a few of the problems facing France.
A Great Deal If You Can Get ItYesterday (June 20) the French called a Grand Summit of businesses, unions, and government officials to address the needed reforms to make France more competitive and its national budget more sustainable. Debt and deficits are high and rising as the country rolls into yet another recession in response to President Hollande’s hard left turn last year. [size= 13px; color: #222222]One of the key issues is a very controversial plan to reform pensions.[/size] Stratfor notes:
France spends roughly 12.5 percent of its gross domestic product on pensions, more than most almost any other Organization for Economic Co-operation and Development member. (For reference, Germany spends about 11.4 percent of its GDP on pensions, and Japan spends roughly 8.7 percent.)
[Note: elsewhere we find that France has a comprehensive social security (sécurité sociale) system covering healthcare, injuries at work, family allowances, unemployment insurance, and old age (pensions), invalidity and death benefits. France spends more on ‘welfare' than almost any other EU country: over 30 per cent of GDP as a total entitlement cost. As a reference, that would be about $5 trillion in the US.]
The fact that an increasingly larger proportion of France's population qualifies for pensions factors into the debate. In 1975, there were 31 workers paying contributions for every 10 retirees; today, there are 14 workers paying contributions for every 10 retirees. As the baby boomers from the 1950s and 1960s begin to retire in the next decade, the pressure on France's coffers will grow substantially. The deficit of the French pension system is projected to double between 2010 and 2020, when it will exceed 20 billion euros.
It is hard for Americans to understand just how much it costs to support the average French worker (or to be self-employed). From Paris Voice:
Total social security revenue is around €200 billion per year and the social security budget is higher than the gross national product (GNP), i.e. social security costs more than the value of what the country produces. Not surprisingly, social security benefits are among the highest in the EU. Total contributions per employee (too around 15 funds) average around 60 per cent of gross pay, some 60 per cent of what is paid by employers (an impediment to hiring staff). The self-employed must pay the full amount (an impediment to self-employment!) However, with the exception of sickness benefits, social security benefits aren't taxed; indeed they're deducted from your taxable income. Equally unsurprisingly, the public has been highly resistant to any change that might reduce benefits, while employers are pushing to have their contributions lowered.
And of course, almost the first thing that Monsieur Hollande did when he took office last year was to return the retirement age at which you qualify for a pension back to age 60 from the extremely controversial 62 that his predecessor, Sarkozy, had barely managed to push it to. Sarkozy’s “reforms” were greeted with massive protests, and Hollande used them to engineer a sweeping election victory for the Socialists. (I put “reforms” in quotes because nowhere else would a retirement age of 62 be seen as draconian, nor would the rest of the changes Sarkozy pushed through.)