from Follow the Money

France: The most “Anglo-Saxon” of the big 3 continental economies

March 31, 2006

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That's a headline you won't see in the financial or popular press. 

The basic narrative is already established:  France won't change, and as a result, will lag behind the more flexible "Anglo-Saxon" economies.

French labor market and social institutions certainly do differ from those in the US.  Personally, I think the US could learn a thing or two from France's health care system (I have direct experience with both systems, having lived in both countries).    And I suspect France could learn a thing or two from the US as well.  Not all aspects of the French model are working right now.

But a bit of modesty is in order too.   The US hasn't exactly done much better creating private-sector jobs than France - and some private sector jobs stem from a surge in government spending, as Kash notes.  The case for emulating the American model would be far stronger is the gains from higher productivity were broadly shared.   Massive structural reform so that CEO productivity (and pay) can go up isn't going to appeal to everyone.

But the established narrative that focuses on France's resistance to market liberalization - Anglo-Saxonization, so to speak - misses one key fact:  France, despite the absence of reform, has enjoyed domestic-demand led growth for the last ten years.  Sort of like the US.     Germany has done more reform but has far less growth in domestic demand.  And Italy lags in all respects.

France isn't the America of the Eurozone.  Spain wins that title.  Huge housing boom.  Huge current account deficit.  But France runs second - at least if you look at most macroeconomic variables.  

French housing prices are frothy.  See this BNP report on Spain - it provides lots of useful cross-country comparison.   French domestic demand growth hasn't kept pace with the US, but it has far outpaced domestic demand growth in Germany.  It certainly tops the Eurozone average.  Imports are growing faster than exports.  And France's current account balance has shifted from a surplus to a deficit.  UPDATE. Daniel Gros has a nice chart on p. 7 of this .pdf showing the correlation between European housing prices and European current account deficits.

In other words, France has done what the US now wants from the rest of the eurozone: it has grown on basis of domestic demand, not exports.  

Consider the evidence:

Growth in final domestic demand from 1997 through 2006 (2006 obviously is an estimate).  All data comes from the IMF's WEO:

USA: 3.7%; France 2.4%, eurozone 2.0%, Germany 0.8%. 

Remember, French population growth lags US population growth, so about 1% of the difference stems from faster population growth in the US.

Consumption growth was pretty buoyant in February too.  France's higher domestic demand growth isn't just a product of data from 1999 or 2000. Domestic demand growth has averaged around 2% in France from 2002 on, while it has been absolutely anemic in Germany.   

Growth in consumption expenditure (1997-06):

Spain, 3.9%, USA 3.7%, France 2.3%, Eurozone, 1.9%, Germany 1.0%

Difference between import and export volume growth (1997-2006:

USA: 3.2%; France: 1.2%; Germany: -1.5% (positive number means imports grew faster than exports)

Change in current account balance (1997-2006)

USA: - 4.5% of GDP

France: -4.2% of GDP ( assuming a deficit of -1.6% of GDP in 2005 v. a surplus of 2.6% of GDP in 1997 -- for this number, I used the OECD forecast)

Eurozone: -1.2%

Germany: +4.7%

Like I said, the basic dynamics of the French economy parallel those of the US economy - not of the German economy.  Housing price appreciation spurred consumption growth and led the current account balance to deteriorate.  Per capita GDP actually has grown faster in France than in Germany or Italy over the past ten years (IMF data), despite what Stephen Pearlstein writes:

What's so galling about the French is that, in the name of equality and solidarity, they are well on their way to creating ... one of the least vibrant economies in the industrialized world.

The fact that France isn't the least dynamic industrialized European economy isn't unambiguously good news for France.  Decent growth and a housing boom didn't bring about a big fall in French unemployment, for example.  Then again, decent growth and a housing boom in the US in the fast few years haven't generated a big surge in median wage growth.

I do think the similarities between the sources of French and US growth are something that I think deserves a bit more notice, even if it doesn't fit into the standard narrative, which focuses French stagnation and on differences between French and American labor market institutions.

I didn't make up the numbers - they are all verifiable.

While on the subject, let me mention one other thing:

Emmanuel is now writing (and writing well) in English at A Fistful of Euros as well as in French.    An excerpt from a recent post:

In 1968, students were revolting against the idea of their own future being a dull career in plastics. Today, the desperately want the career and are afraid that what they'll get, instead, is a life of short-term job contracts, instability and unemployment.

As seen through the prism of the international press, the hostile reaction of the youth to the reform of French labor laws is counterproductive at best, idiotic at worst... After a protracted showdown, the government will eventually back off, thereby killing any chance of reverting the slow but inevitable French economic decline. Film at 9. ... In fact, things are a wee bit more nuanced.

I tend to agree.

There is a certain irony in all the commentary arguing that French students are blocking France's transition to the twenty-first century, while de Villepin -- a poetry-writing, never-elected enarque who in many ways embodies the French post-war establishment -- repesents the future.

Emmanuel - citing Eric Chaney of Morgan Stanley - notes that workers everywhere, not just in France - want a degree of security.  And as Wolfgang Munchau notes, the precise reforms embraced by de Villepin may be counterproductive.   Blanchard's proposal certainly makes more intuitive sense to me.

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