Next to the turmoil and rage on the streets of Athens and Madrid, the anti-austerity manifs this weekend in Paris were pretty tame. In the first demonstrations against the Socialist president, François Hollande, a few tens of thousands marched peacefully. No barricades were erected, no cobblestones hurled. France, the euro zone’s second-biggest economy after Germany, has so far been spared the social upheaval—as well as the austerity—that has marred the battered periphery. Yet France has grave economic woes of its own. Unless Mr Hollande takes courageous steps this autumn to resolve them, he risks undermining the currency area’s very core.
France is a large, rich country and the world’s fifth-biggest economy. Although one credit-rating agency has stripped it of its triple-A status, its borrowing costs have fallen to historic lows. Household debt is modest. Per hour worked, French employees are productive. A high birth rate gives France a long-run advantage: in the next 25 years its population could even overtake Germany’s.
Yet two underlying weaknesses hold France back. One is a chronic inability, in good times as well as bad, under left as well as right, to bring down public spending. This now accounts for 57% of GDP, more even than in Sweden. France has not balanced a budget since 1974, and its debt, which finances all those splendid public services and an army of staff to provide them, has now reached 91% of GDP. The other weakness is a competitiveness gap that has opened up over the past decade with Germany. This is chiefly linked to rigid labour-market rules and payroll charges on employers, which between them keep labour costs high and deter job creation. More >>
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