Germans Worried About French Slide into Recession

Unless France makes economic reforms, it could plunge Europe in an even deeper crisis.

German policymakers are concerned about France’s slide back into recession and the economic program put forth by its socialist president François Hollande which could further reduce the nation’s competitiveness.

Two German officials told the Reuters news agency earlier this week that finance minister Wolfgang Schäuble was considering issuing a study into French economic reforms, a painful vote of no confidence from Berlin in Hollande’s efforts to revive his country’s economy.

French gross domestic product is expected to shrink .1 percent in the last quarter of 2012 as industrial output has slumped and business confidence is fading. Unemployment is at a thirteen year high and the European Commission expects it to rise further next year as exports will likely fall.

Youth unemployment is already at 25 percent, prompting thousands of ambitious young Frenchmen to make the jump across the Channel and set up shop in London, sometimes called “France’s sixth biggest city” due to the large émigré population there.

The Germans have ample reason to worry. 10 percent of German exports, worth more than €100 billion annually, goes to France. It is the second largest economy in the eurozone. If it follows Italy and Spain down the path to rising borrowing costs and maybe even speculation about having to request a bailout, it could plunge the currency union in so deep a crisis that it might never emerge from it.

That prospect is still far-fetched but the spending and tax policies pursued by Hollande’s government haven’t steered the country off its perilous course. He announced €20 billion in additional tax increases in September to help achieve a 3 percent deficit target for 2013, among them income and sales tax hikes. Investment income is set to be taxed at the same rate as regular income while France’s 34.4 percent corporate tax is already more than twice as high as Germany’s 15.8 percent rate.

The sales tax increase is meant to finance a payroll tax cut which would somewhat alleviate the burden on businesses but they will remain among the most heavily regulated in Europe. As a result of excessive regulations and high levels of legally mandated pay and vacation, French workers are far more expensive than their neighbors. An hour of work costs $43 on average in France compared to $36 in nearby countries. It is little wonder therefore that French companies are outsourcing production to Central and Eastern European nations where labor is not only cheaper but governments are less prone to interfering in their business altogether.

Government spending accounts for more than half of the French economy and finances entire industries, including electricity, postal services and railways which are owned either in part or completely by the state. Public sector spending will likely have increased €6 billion by the end of this year to 56 percent of GDP. Since the beginning of the European sovereign debt crisis, France’s debt-to-GDP ratio has risen 30 percent to nearly 90 percent this year.