France, by many standards, has the highest quality of life on the face of the planet. I know this is an opinion, but it’s not an unusual opinion. The problem is sustaining that high quality of life and extending it more broadly. For hundreds of years the French, Germans and British fought over control of Europe. Since the establishment of the European Union those conflicts and animosities have been held in check. For almost fifty years from 1946 until 1994 when the European monetary system began, the unification of European countries worked its way forward, but until they tied their money together, it was always a negotiation among individual countries.
The Euro Effect
Once the Euro-zone was established Europe was no longer a group of individual countries: their money was managed as one. Of the three most highly developed countries of western Europe, Britain, France and Germany, Britain held its money out of the Euro-zone For the first fifteen years the Euro took hold and grew well. Western Europe looked as if it were a solid unified region of the world and their currency challenged the U.S. dollar. At some points it looked as if the Euro was headed towards replacing the dollar as the world’s reserve currency. Yet, it never happened.
So how does this money history tie into France’s industrial cycle? Since 2008 the world’s financial system has been under stress and at some points severe stress. The Euro-zone has not weathered it well and France is at risk. Here’s how it works. Because Europe is not a federation, except in their money system, the economy of each country remains independent. It’s an odd circumstance, independent economies but a federated currency system. The Euro is managed as an all Europe currency and that means it’s not managed to help any particular country. The strongest economies ride along with the Euro system and the weaker economies are pounded up and down (but mostly down) by the Euro currency. Germany is the strongest economy in Western Europe. Germany is riding the storm. France is doing less well, but is not devastated as are Spain, Italy and Greece.
Now let’s look at France’s industrial situation. France has the tenth largest GDP in the world with an economy that generates the equivalent of 2.291 trillion dollars a year. By way of comparison, Germany generates 4.761 trillion dollars a year and Britain generates 2.375 trillion dollars per year. The French economy is composed of 2 percent agriculture, almost 19 percent heavy industry and 79 percent services. Tourism is the largest single industry in France and France has the largest tourist industry of any country in the world. Four percent of the French working people are in agriculture, twenty-four percent in heavy industry and seventy-two percent in services. Clearly, tourism requires a lot of service industries.
Let’s loop back to the first ideas of this post where I mentioned the French quality of life. The high quality of life is due in large part to a long struggle with social support systems. France is a capitalist country with a variety of socialized government support structures that enable people to live well. The health care system is generally excellent, the schools are good to excellent and the work and retirement systems are good. Many working people get long vacations (four or five weeks) and work thirty-five hour weeks. The institutionalized future, the systems that supports how people manage their futures are generous in France.
The problem is that with the economy tied into the Euro-zone there is no way to manage French money, simply because there is no longer any French money, instead there is the Euro. Without being able to manage French money with interest rates, French fiscal policy is the only tool to keep the economy in balance and Europe is taking a stringent spending approach to economic management. When the world economy turned down in 2007 the European economies turned downward too. Unlike the United States which is free to manage its money to fend off bank failures and complete devastation along with fiscal policy, the French are shackled.
The French Dilemma
With a commitment to European union and difficult economic times in which industry produces little or no growth, the French are in a bind. In 2011 the French budget was over 54 billion dollars in deficit and in 2012 it grew to almost 59 billion dollars in deficit. President Francois Hollande’s socialist government is committed to balancing the budget, while also continuing in the EU and sustaining social support systems, but something has to give. Some politicians call for raising the length of the 35 hour work week, which is controversial. In 2010, then President, Nicolas Sarkozy attempted to raise the retirement age from 60 to 62. Strikes and protests ensued.
The troubles don’t stop there. Every part of French social support is under attack and has been for the course of the great recession. Employment opportunities are particularly conflicted in Paris, but also in other French cities with large Muslim populations. For a decade or more the growing Muslim community in France has found it difficult to find work, with unemployment of as much as 30% in their communities. By not hiring Islamic immigrants, and especially Islamic youth, the French social support system avoids expansion.
Even the excellent French health care system has faced pressure to cut costs. Ofter the 2012 election, the newly elected socialist government pledged to reduce excessive extra-billing by physicians. By May 2013, of the 25,000 eligible French physicians, fewer than 3,000 had agreed to the governments contractual program that cuts back extra billing.
The point of these conflicts is they indicate the pressures within French government to find ways to continue supporting a high quality of life but also balance the French budget. The government is looking at every avenue for cost savings and encounter protest and difficulties. France, as the third largest economy in the European Union is the most vulnerable to economic downturn. When Europe goes into recession France is less economically durable than either Germany or Britain. The French industrial system, with tourism at its center, is vulnerable to global contractions and that puts the entire French social structure under stress.
In a more severe recession than we have just experienced, the French economy is not likely to survive as it is currently arranged. The roulette wheel of European Union is likely to spin a game’s over slot for France, and exactly what that means is probably the demise of the Euro-zone and maybe far more.