By Jozef Kosc

Since 2012, French President François Hollande as well as his Minister of Industry and Economics, Arnaud Montebourg, have nobly set out to invert the curve of unemployment in France with a concerted effort of national industrialization through various policy intervention mechanisms. In November 2013, the Ministre du Redressement Productif resurrected a World War II era “Fund for Economic and Social Development (EPD),” promising over 300 million euros in assistance to struggling national firms as part of a “plan of economic resistance.

Prior to that, the Ministry of Industry pledged billions of dollars of funding to 34 national industrial projects. The trend continues in 2014, as Montebourg launched this year’s political calendar with a series of open critiques against high-ranking European Union officials for failing to loosen continental regulations on the state funding of industry. According to Montebourg, the resulting dominance of the free market in Europe — untouched by state sponsorship beyond established thresholds — amounts to “obsoletism, autism, imprisonment, [and, last but not least,] fundamentalism.” Mr. Almunia, the European competition commissioner and chief recipient of Montebourg’s criticism, was notably firm in his own retort on the question of a controlled-market Europe: “Some politicians still fail to understand that the European economy cannot be reinvigorated in a defensive way, through protectionism or nationalism…Europe will not find its place in globalisation by launching a subsidy race with the rest of the world.”

In many ways, Almunia’s sentiment illustrates France’s bizarre position within the European economic model. As Hollande’s government continues to call for policies of industry subsidization and increased protectionism, the OECD, the IMF, and an increasing list of independent economic experts, have cited these very policies as the cause of — not the cure for — a national economy spurring itself downwards into greater recessionary figures.

Businesses are leaving France for the UK and elsewhere, with the onset of a new 75 per cent tax rate. Photo credit: Jozef Kosc

 As the fifth-largest economy in the world, the growth of France remains integral to the overall growth of the European Union. There is no denying that national interventionism, a form of non-tariff industry protectionism, is a tempting response to global trade shocks and temporary increased unemployment. Funding failing national industries provides a quick Band-Aid solution to joblessness. When large multilateral companies such as Coface announce over 62,000 company bankruptcies across France in 2013, the resulting media firestorm is all the more likely to vouch for stronger national economies and policies enforcing less dependence upon multinational enterprises. Yet, are such well-intentioned policies preserving France’s future competitiveness within the European market? Or are the critiques of Mr. Almunia, the OECD, and the IMF justified?

In the spirit of the “fact-checking” mantra of this issue of The Paris Globalist, it behooves us to break down the figures behind political rhetoric. The IMF reported that in 2012, the French national GDP saw absolutely zero growth. By the end of 2013, the GDP rose approximately 0.2 percent — a remarkably low figure vis-à-vis the European community of states. While the OECD now predicts a 1 percent growth rate for 2014, even this stagnated figure is largely illusory, due to lopsided deficits in vital industries key to stabilizing future unemployment.

The “new sick man of Europe” reported recession-level declines in manufacturing and service sectors at the end of 2013, creating recession-level conditions of output and preserving a growing trade deficit. In fact, France remains the only country in post-crisis Europe that isn’t experiencing recent growth in these labor-intensive sectors; even the previously slumping economies of Italy, Spain, Greece, and Ireland have gained notable traction in recent months, paving the way for more and greater jobs. Once the beating heart of the European Union, the bread basket nation now bears witness to a 16-year high unemployment rate of 11 percent. Meanwhile, economists predict even greater losses for the French as the year progresses. Youth unemployment has already reached a record high. With courts approving an unprecedented 75 per cent tax rate on top earners late last year, many financiers have begun to shift their national bearings — hopping over the English Channel to join their 400,000 brethren in London, and leaving behind even fewer work opportunities.

None of this should be particularly surprising. Cross-sector studies of 10 top-ranking OECD countries — including France — have long revealed the positive influence of delocalization on wages and the price of goods. Wages increase as a result of greater trade thresholds and relatively low tariffs. This makes intuitive sense — as trade liberalization provides access to new consumers, there is an increase in demand for national products. The supply of exports rises as a result of demand, and greater demand incentivizes higher wages in higher-demand sectors. Protectionist policies are also known to increase the price of goods, while amplified imports have a strong negative effect on the price of goods. Unsurprisingly, France’s booming trade deficit continues to grow, as the result of excessively bureaucratic labor policies and sky-high payroll taxes which keep importers hesitant to purchase French national products. It should be added that reactionary policies which limit trade openness by supporting national industrial fronts are not only contributing to national stagnation, but — through the disruption of the natural flow of capital — are also helping to cultivate dangerous conditions that can give rise to regional European and even global economic recession. When global trade fell by 12 percent in 2009, unemployment rates worldwide immediately jumped by 0.9 percent. Notably, countries which suffered the most from the 2008 global market recession were those such as Egypt and Uganda, with lopsided-investments in single sectors like tourism, and unequal concentrations of exports in specific state-subsidized sectors such as iron and steel production.

French unemployment sits at a record high of 11 percent. Economists blame protectionist policies. Photo credit: Parti Socialiste, Flickr CC.

With these facts in mind, it is important to acknowledge the principled intentions of Hollande and his Ministers, who seek to overcome the ills of a temporary and post-recessionary surge in unemployment. Yet such a goal must be attained without crippling future economic growth and employment thresholds. This begs the question of an alternative and balanced approach: how then, ought France to address its present economic woes? Firstly, strong social programs can assist in defraying the humanitarian concerns of provisional spikes in unemployment as a result of trade shocks. In France, a strong social safety net including two years of unemployment insurance, various subsidies, and universally accessible, fully-funded higher education, child care and health care programs is part and parcel of the political system. Fiscal policy space can also work to invite foreign investors to alleviate suffering sectors. However, effective policy space does not translate into direct market interventionism. Proof lies in the growth of French-based multinationals, many of which have increased revenues while national French industries are failing. Corporations such as L’Oreal and LVMH have made huge gains through trade and investments in and from new Asian markets. In a globalized world, long-term growth is dependent upon trade liberalization, market openness and policies that invite foreign investments — not those which resuscitate World War II era interventionist programs.

This article was first published in the Spring 2014 issue of The Paris Globalist. The views expressed in this article are the author’s own and do not necessarily reflect The Paris Globalist’s editorial policy.