France in pole position to become Europe’s new wonderkid

Economic opinion

La douce France invokes an image of a country balanced between a joie de vivre and a leadership role in economic and technological developments. Currently, and coinciding with a period of economic weakness in Germany, the French economy is one of the growth champions of Europe. The combination of appropriate economic reforms, the impact of international events, and a renewed and stronger international role is turning France into one of the most promising places in Europe. Notwithstanding continuing challenges, the French economy appears ready to play a more prominent role in the European economy.

Growth champion

smart man open shirt to show "France flag" in hero style. France concept - vector

The latest economic growth figures for the European economies indicate that France is one of the better performers. In the second quarter of 2019 the French economy grew by 0.3% (qoq) or 1.4% (yoy). At first glance that doesn’t seem like an exceptional performance, but it actually is, given the growth decline in Germany (-0.1% qoq) and average euro area growth of 0.2% (qoq).


Even more impressive is the healthy industrial production growth recorded in France in July (+0.2% qoq), while many other industrial countries are confronted with, in some cases substantial, production shrinkages (Germany: -0.8%, Netherlands: -0.2%; euro area: -0.4%). In particular compared to Germany, France is economically doing very well. French exports grew by 5% in the first seven months of this year, while German exports increased only by 1%. And French capacity utilization in manufacturing is now at similar levels compared to Germany.

 

From political chauvinism to economic power

President Macron is clearly using the current international political momentum to boost French economic interests. The political fragmentation in Germany and the transition between political generations, in particular the succession of Angela Merkel, provides France with an opportunity to weigh in more on the European agenda. Let’s not forget that Macron won the presidential election with a very pro-European programme, calling for a European economic renaissance on various occasions. Clearly, Macron dreams of a French-led European Union that will boost the European economy, beginning with his own country. Moreover, Brexit offers a unique opportunity for France, not only to regain power in Europe relatively speaking, but also to increase its economic significance within the European economy. It is amazing to see how Macron managed to strengthen the French influence in all European institutions. With Christine Lagarde as ECB governor, France may be able to steer monetary policy towards a more accommodative stance. Moreover, Frankfurt will no longer bluntly call for austerity, as became clear already in Mario Draghi’s latest interviews and speeches. Fiscal stimulus is back on the European agenda. This allows France not only to escape from strict European fiscal rules, but also to provide a framework to develop European investment programmes, jointly financed or more precisely financed by common long-term debt creation.


In addition to the French influence on the ECB, French political tentacles are clearly reaching out to most European institutions. By supporting particular (including non-French) candidates for top positions in European and international institutions, the sphere of French influence has expanded. Most importantly, the new French commissioner, Sylvie Goulard, will be responsible for the European internal market. It can be expected that more French-style and French-beneficial European regulations will be designed to tailor the European internal market towards French economic interests. Previously, the French government very much endorsed the idea of French national champions, by intervening in company restructurings and by blocking foreign acquisitions. The next step will be the opening up of the European market to allow French firms to benefit from increased market potential. One can be sure that we’re going to miss the British market-oriented perspective in European economic policies.
 

The right economics

Apart from these political economy considerations, the economic reality is also supportive of a stronger French economy in the future. Two features of the French economy stand out that underpin this view. First, economic reforms in France have been impressive. In particular, President Macron and his government succeeded in reforming the French labour market. There is still a long way to go, but recent reforms are a structural break with the past. Academic research has long argued that French employment protection legislation reduced job creation. Moreover, more recent research pointed out that such legislation, in combination with the minimum wage policy, also contributed to job destruction, in particular among low-skilled workers.(*) By relaxing the protection mechanisms, one now observes a more dynamic labour market that will support higher economic growth.


A second feature is the very diversified nature of the French economy. France is a less specialized economy, in particular compared to Germany where the automotive and chemical industries are dominant. This diversification offers some protection against current international headwinds mainly caused by the US-China trade war and Brexit uncertainty. It also explains why French industrial production weathered the international challenges much better (figure 1). Not only in terms of economic activities, but also geographically, France is more diversified. Again, this is an advantage in times of economic conflicts.
 

Figure 1 - Industrial production (excluding construction, monthly data, index January 2018 = 100)

Source: KBC Economics based on Eurostat, Fed

Bright future, but still pitfalls

Hence, the economic outlook for France is brighter than for many other European countries. However, there are still challenges ahead. In particular, a faster pace of growth should be quickly translated into benefits for French society. Social unrest is never far away in France, and recent new protests by the gilets jaunes indicates that the movement is far from dead. Only real benefits to the French public will be able to mitigate the protests while creating the right environment to continue economic and labour market reforms. There is a risk that the advantages of renewed growth come in too slowly, in particular amidst a global economic weakening. Moreover, political developments in France may force Emmanuel Macron to change his plans. His pro-European vision will only be supported by the public as long as there is an actual return to French society. The question is again whether there will be sufficient and fast enough progress at the European stage to make that happen. Finally, in a politically supportive environment, there is a risk that French businesses won’t take up the responsibility themselves. Ultimately, it is business decision-making, in terms of new investments and innovation, that determine the long-term growth potential of any economy as well as job creation. With an unemployment rate of 8.5%, France still has a long way to go. Public policies and political support can help, but the vision and ambition to take up the challenge is required from entrepreneurs themselves.

(*) Cahuc P., Malherbet F., and Prat J. (2019), The Detrimental Effect of Job Protection on Employment: Evidence from France, CEPR Discussion Paper 13767.

Disclaimer:

Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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