PPT intervention

1. Can France reform itself within the
euro
Professor Brigitte Granville
22 April 2015
Centre for Globalization Research, Queen Mary University of London, Mile End Road,
London, E1 4NS, UK (e-mail: b.granville @qmul.ac.uk
124/04/2015 Brigitte Granville

2. Economic Divergence between France and
Germany
Between 1999 and 2008, the divergence of competitiveness measured by Unit
Labour Costs deepened, and in particular with Germany.
Table 1 – Unit labor costs, per cent change between Q3 1999 and Q4 2008
• .
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Granville, B. and D. Nagly (2014). "Conflicting incentives for the public to support the EMU” Working Papers, Queen Mary,
University of London, School of Business and Management, Centre for Globalisation Research. 50.
Note:
Competitiveness indicator, relative unit labour costs, overall economy, Index: 2005=100, price index, seasonally adjusted
Source: Authors ‘calculation, OECD Economic Outlook
France Germany Greece Italy Portugal Spain
ULC 5.20 -15.94 19.79 12.54 10.03 20.72
relative to
Germany 21.14 0.00 35.73 28.48 25.98 36.67
Brigitte Granville

3. The list of poor performance is long
• Under the euro, France has faced a sharp loss of
export market share:
– France has a current account deficit of ‐1.05% in 2014
compared to an estimated 3% surplus current account
balance in Germany (latest forecasts by the IMF, WEO,
2015).
• Foreign direct investments in France fell by 77 %
while FDI in the European Union rose by 37.7 % in
2013 year on year (UNCTAD)
– Inward investment into Germany quadrupled in 2013
compared to 2012.
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4. The euro protects the ‘exception francaise.’
• The euro has allowed the French ruling elite to pursue
its expansive policy of redistribution on credit by
increasing public and semi‐public budget deficits while
maintaining price stability and not reforming:
– The share of public spending in GDP increased in France
from 51.7 % in 2001 to 57.1% in 2013, an increase of 5.4
percentage points (Cour des Comptes, 2014)
– while in Germany the share of public spending in GDP
decreased by 2, 9 percentage points of GDP, from 47.6 % in
2001 to 44.7 % in 2013. (Cour des Comptes, 2014)
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5. The list of poor performance is long
• Chronic high budget deficits have resulted in
public debt increasing from about 64% of GDP
in 2007 to about 95% in 2014; (source: Cour
des Comptes, 2014)
• increase in structural unemployment,
bankruptcies, outsourcing and economic
stagnation
• flight of capital, students, senior executives
and talent.
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6. The euro protects the ‘exception francaise.’
• The gap between French and German debt stands
at 22 percentage points of GDP in favour of
Germany. (source: Cour des Comptes, 2014)
• France spends more than Germany on social
protection, health , education, public facilities,
and defence:
– In 2001‐ 2013, Germany has reduced the weight of its
social benefits by 1.4 percentage points of GDP and its
other operating expenses by 1.2 points:
– In 2001‐ 2013, France increased its social benefits by
4.1 points and the payroll of public administrations
and current purchases and supplies, by 1.2 points.
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7. The euro protects the ‘exception francaise.’
(source: Cour des Comptes, 2014)
• Germany reduced its investment share of GDP
in contrast to France, which stabilized them:
– French governments have maintained a relatively
high level of public investment between 2001 and
2013 (3.3 percentage points of GDP in France
against 1.5 in Germany in 2013).
• La cour des comptes observes that France has
not reduced the number of civil servants and
has not restructured the health sector.
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8. The euro protects the ‘exception francaise.’
• France has not balanced its public finances by
reducing its spending:
• France has overwhelmingly relied on a
continuous and sharp increase in taxation,
2013 has shown the limits of such policy as
the level of collected public revenue has
sharply declined. (source: Cour des Comptes,
2014)
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9. The euro protects the ‘exception Française.’
source: Gumbel, P. (2013). Elite Academy, Enquete sur la France malade de ses grandes
ecoles. Paris, Denoel.
• The French education system is elitist and increasingly
unequal :
– The PISA report shows that social inequalities have worsened
since 2003 (OECD, 2012).
• Students coming from disadvantaged backgrounds have
little chance to be admitted to grandes ecoles such as ENA
or the Ecole Polytechnique
• Once admitted to the grands corps such as the Finance
inspectorate, a job is for life. (art. 4 of the Act of 1983 on
the general status).
• Recruitment takes place between the ages of 18 and 25,
according to academic ability.
• Their training is general knowledge:
– history, public law, public finance and international relations.
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10. Negative Impact on the economy
source: “Institutions, Thickets and Elites:
French Resistance and German Adaptation to Economic Change, 1945‐2014”,
forthcoming, Granville, Prevezer, Martorell Cruz; Gumbel, P. (2013). Elite Academy,
Enquete sur la France malade de ses grandes ecoles. Paris, Denoel.
• Secrecy and lack of democracy: people do not
need to know, they are not “educated”:
– monopoly of information
– No political control over the appointment of the
Ministry’s chief of staff, forcing the Minister to
accept someone from the same inner circle:
• The priority for the administration is to make sure that
the chief of staff is from the same grands corps such as
the Inspectorate of Finance or the Court of Auditors.
– Endogamy is the rule and individuals with
unconventional backgrounds are kept out.
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11. Negative Impact on the economy:
Corporate governance
(sources: Kramarz, F. and D. Thesmar (2013). "Social networks in the boardroom." Journal of the European
Economic Association 11(4): 780‐807.
Nguyen, B. D. (2012). ""Does the Rolodex matter? Corporate elite's small world and the effectiveness of boards
of directors." Management Science 58(2): 236‐252.
• Firms with CEOs and directors from grandes ecoles network
perform badly:
– incentive problems:
• the CEO is less likely to be ousted for poor performance
• more likely to find a new and good job after being fired.
• Higher executive compensation.
• members of the network might not want to be tough with their
peers for:
– fear of reprisal
– loss of personal and network reputation.
• Social ties among top executives are factors that significantly
undermine the effectiveness of the board of directors
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12. • The legislative inflation is dramatic:
its major effect is to complicate and destabilize French
society, making it less and less able, in consequence, to accept
structural reforms.
Source: Verdier‐Molinie, A. (2015). On va dans le mur. Paris,
Albin Michel.
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13. Negative Impact on the economy:
Economic freedom and growth
source: “Institutions, Thickets and Elites:
French Resistance and German Adaptation to Economic Change, 1945‐2014”, forthcoming, Granville, Prevezer,
Martorell Cruz;
• index of economic freedom (Heritage Foundation):
– 2015 France = 73/ 186 countries/ Germany = 16/186
– Compared to 1995 where France ranked 27 and Germany ,
17
• Doing Business index :
– 2014 France = 31 compared to Germany =14 :
– the heavy hand of the state is illustrated by the difficulty to
get a construction permit, getting electricity, credit and
registering property.
• The Quality of Government (QoG) survey (97 countries):
– the French public administration is perceived as impartial
and professional, but is also seen as closed and elitist.
– Perceptions of lack of impartiality across public education
and law enforcement.
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14. France cannot reform within the Euro
source: Granville, B. and D. Nagly (2014). "Conflicting incentives for the public to support the EMU” Working
Papers, Queen Mary, University of London, School of Business and Management, Centre for Globalisation
Research. 50.
• France is a free rider in terms of fiscal policy issuing too much
debt raising the risk of default:
– This free rider problem cannot be solved by imposing fiscal rules as
France is “too big to fail” and/or Germany “too afraid to constrain”.
• The French ruling elite have no incentive to reform as long as
it is part of the euro:
– borrow at German interest rate
– Actions by the ECB in its favour (QE)
• Even if the fiscal treaty was complied with, French public debt
position would remain unsustainable given:
– zero economic growth
– low inflation rate.
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15. If the current snail’s pace of reforms persists, France’s
public debt to GDP ratio will be on an unsustainable
path
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Source: Authors’calculations, data from Thomson Reuters
Standard debt‐accumulation equation used. IMF WEO 2013 assumptions adjusted by taking into
account slow progress on structural reforms i.e. the current pace of debt accumulation is continued.
No debt monetisation assumed Brigitte Granville

16. France cannot reform within the Euro
• The euro is protecting the inertia of the French elite,
their discourse is to overestimate the cost of EMU exit
and to take Germany hostage for its fiscal laxism.
• France’s ruling elite dreams of getting more money
from the ECB in a painless way on the grounds that the
alternative would be the “unthinkable disaster” of
France leaving the euro – meaning the end of the euro.
• This bargaining advantage for France could be
disturbed by a radical change such as a political party
that challenged the above mentioned non‐bargaining
position gaining a substantial share of voter support.
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