Dueling Directions

A Stagnant France Sans Fraternité

Manuel Valls and Angela Merkel
Manuel Valls and Angela Merkel.
  • Why it matters

    Why it matters

    France keeps pushing back a reduction of its budget deficit, which is a risk to financial stability in the euro zone.

  • Facts


    • France has again postponed cutting its budget deficit of 3 percent of economic output from 2015 to 2017.
    • France needs more reforms and stronger efforts to reduce its budget deficit, said the country’s central bank president, Christian Noyer.
    • To spur growth in the euro zone’s second largest economy, France’s President François Hollande named a former investment banker as new economics minister last month.
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As French Prime Minister Manuel Valls visited Germany this week to tell politicians and business leaders his country was serious about reforming the economy, two top French bankers told a different story: The changes don’t go nearly far enough.

France, Europe’s second-largest economy, has struggled to recover from the euro zone debt crisis that swept the continent in 2011 and 2012. If it does not succeed in reducing its budget deficit and debt pile, it could pose a risk to E.U. financial stability. A few years ago, ailing finances in Greece, Portugal and Ireland destabilized European financial markets.

Faced with sluggish growth and a reform-averse society, President François Hollande shook up his cabinet last month, announcing a former investment banker as new economics minister to kick start growth and help France to reduce its debt pile of 93.8 percent of economic output.

As part of a plan to boost economic growth and help improve public finances, France plans to cut €40 billion in taxes and costs for French firms, but this is not enough, the French central bank president, Christian Noyer, told Handelsblatt publication WirtschaftsWoche.

“We should also reduce the high level of bureaucracy in the economy. It is a nightmare to see how many regulations exist in the real estate sector, for instance. That is a reason why the property market is developing so weakly,” said Noyer, who is also a member of the European Central Bank Governing Council.


“The French government clearly realizes that is has to present a broad reform and consolidation agenda, which convinces its European partners.”

Christian Noyer, French central bank president

“We also need increased flexibility when it comes to working hours and a loosening of wages, for example a more flexible approach to the minimum wage, making it dependent on a sector or company,” Mr. Noyer said.

France has stopped short of reforming its 35-hour week, which is seen by some as an obstacle to increased productivity and growth. The chief executive of France’s second-largest bank, Frédéric Oudéa at Société Générale, also urged labor market reforms in an interview with Handelsblatt.

“In addition to reducing the budget deficit, we need a number of reforms in France, especially in the labor market,” said Mr. Oudéa, who started his career as civil servant in the French government.

As a sign of the slow progress in improving France’s finances and economy, the country was forced two weeks ago to ask for more time to cut the country’s budget deficit below 3 percent of economic output, the euro zone limit.

France will not meet the target until 2017 instead of 2015, when the deficit is now expected to be 4.3 percent of economic output.

The central bank governor, Mr. Noyer, who has been high-ranking administration official at the French finance ministry, also urged the French cabinet to vigorously reduce spending.

French budget deficit-01
France’s budget deficit as a percentage of gross domestic product is not expected to drop to 3 percent until 2017, whereas it was originally expected to be 0.3 percent by that time. Source: French government


“The French government’s announcement that it will fail to meet the deficit target is very disappointing,” Mr. Noyer said. “Especially with the current low inflation rates, I think savings could be made much more aggressively in the French budget.”

“There are no reasons that we cannot achieve our budget goals. The French government clearly realizes that is has to present a broad reform and consolidation agenda, which convinces its European partners,” he added.

Fifteen years ago, when German unemployment was above 10 percent and growth was sluggish, Germany was dubbed the “sick man of the euro” by the Economist. Since then, Germany has reformed its labor market, becoming a beacon of stability in Europe and an economic powerhouse, exporting machines and cars all over the world.

In a telling sign of how fates have reversed, Mr. Valls, the French prime minister who met with Germany’s Chancellor Angela Merkel on Monday, was defensive, saying France “is not the sick child of Europe” at a press conference, according to news agency Reuters.

The interviews with Mr. Noyer and Mr. Oudéa first appeared in WirtschaftsWoche and Handelsblatt respectively. The authors are specialist reporters, covering economics and finance, or reporting out of France as a correspondent. Contact the authors: angela.hennersdorf@wiwo.de, Karin.Finkenzeller@wiwo.de, landgraf@handelsblatt.com, delamotte@handelsblatt.com and kreijger@handelsblatt.com.

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