Reference no: EM133051121

Case Study: France's Troubled Economy Questions:

In 2013 France's GDP was 0.3 percent lower than it was at the beginning of 2008, indicating a period of stagnation. In contrast, Germany was 2.6 percent ahead. Furthermore unemployment in France was at a 16 year record high of 11 percent, with youth unemployment at almost 25 percent. Why has France, the fifth largest economy in the world, had such difficulty in escaping from recession when its competitors appear to be on the right path? France has a mixed economy and the state continues to play a leading role in directing economic policy. In 1981, when UK Prime Minister Mrs. Thatcher was considering policies of privatization and selling off state assets, President François Mitterand in France was elected on a programme of nationalizations. Today the state is still a major shareholder in the top French corporations of the CAC 40 (EDF, Alstom, SNCF, France Telecom, La Poste, Air France). Yet these large corporations, faced with falling domestic demand, have steadily expanded their activities beyond French borders over the last 30 years. In 2011, 72 percent of their global turnover was achieved internationally and less than 30 percent of their staff were employed in France. In general, companies are producing less in France and more overseas, leading to a trade deficit in 2011 of €71 billion; by comparison Germany had a trade surplus of €158 billion. Economic liberalism as a political doctrine, whereby the state adopts a laissez-faire approach, has never received popular support in France. If there a factory is threatened with closure, the state is expected to find a solution. To this end, the current Socialist government has created a Ministry of Industrial Restructuring, whose primary aim is to prevent the bankruptcies of French companies and the eventual closure of factories through the establishment of 22 regional commissars. The size of the challenge can be measured by the fact that France has lost more than 40 percent of its industrial jobs in the last 30 years. France has a history of high taxation and high public spending. The consequence of this is that at times of economic downturn it is able to provide an effective safety net for its citizens and thus maintain levels of consumption, yet the recent evidence suggests that it is also more difficult to restart the economy: slower into recession, but slower to get out of it too. French public spending is the highest in Europe at 57 percent of GDP. The budget deficit target of 3 percent of GDP, set by the European Union, has to be achieved by 2015. Public debt as a percentage of GDP is one of the highest in Europe at over 90 percent. Businesses in France suffer the highest levels of global taxation (taxes and social charges combined) of the seven leading European nations and it remains the least attractive country fiscally. The high levels of public spending mean that there are relatively generous provisions for the unemployed, pensioners and those in need, but there is growing discontent with the higha rates of both direct and indirect taxation needed to fund the French social model. Despite the welfare system, income inequalities persist, as illustrated by the Gini coefficient. France's Gini ranking is only in the middle of the European table and it remains a less equal country than Finland, Sweden and Germany. While many of the indicators for France are in the red, a number of positive points should assist the move out of recession: France is the world's leading tourist destination; it possesses a world leading aeronautics, pharmaceutical, wine and luxury goods industry; it has a positive demographic with one of the highest birth rates (2.0 children per female) in Europe and a dynamic, young population. The challenge for the government is to boost growth and employment, while at the same time reducing spending and taxation through structural reforms and preserving the levels of social protection, to which French people are accustomed.

1. At times of economic crisis what are the advantages and disadvantages of the French model of social protection?

2. French companies are more active internationally than domestically. Why do you think the French state still holds shares in them? How would you characterize the role of the state in the French economy?

3. Do you think that the French social model can survive without radical structural reform? Please give your reasons.

4. From the perspective of international business what factors might attract investors to France and what factors might dissuade investors?