In an empty Washington, where holiday vacations had already begun, the International Monetary Fund published the annual surveillance report on France the Friday afternoon before the Christmas holiday. Breaking from its usual practice, the IMF did not give the press an advance copy of the report on embargo although it did organize a conference call to discuss the report. However, the conference call was held on December 26, a holiday in France. Why did this happen? The answer lies in the report itself.
Let’s start with fiscal policy. France’s budget deficit is much higher compared to other European countries hit by the crisis. In 2009, it was equal to 7.5 percent of GDP. By comparison, in Italy it was 5.4. By the end of 2012, the French deficit decreased to 4.5 percent and should reach 3.5 percent by the end of 2013, at which point the Italian budget is expected to be balanced. What’s more, French authorities have said that they require five more years, till the end of 2017, to balance their budget. The IMF prefers more neutral terminology, such as “medium-term,” so as to even eliminate any hint of a deadline. Certainly, France does not have the large public debt like Italy has. However, the trajectory over the last few years is perhaps more worrying. For the period 2009-14, the IMF projects an increase of more than 12 percentage points in France’s debt-to-GDP ratio.
Admittedly, the gradual fiscal consolidation may be more a strength than a weakness of President Hollande’s strategy, in that it protects the French economy from harsh measures that are, at least for now, unnecessary. The IMF has acknowledged as much, and goes even further when it notes that “a more measured pace of fiscal adjustment would be appropriate, but European and market imperatives have reduced fiscal space at this juncture”.
Halfway into the report, we finally find the two lines that represent the crux of the fund’s position and provide the metric by which it evaluates the current developments of the French response to the crisis: "With the risks of an imminent break up [of the euro] largely averted, policy priorities have shifted to the process of forging stronger financial and fiscal integration in the euro area and to domestic structural reforms to improve competitiveness and raise potential growth".
It is precisely on this point that the France of François Hollande is in grave difficulty. The sustained decline in the competitiveness of the French economy has translated into a reduction in the country’s degree of international openness of 9 percentage points compared to the eurozone average in the period 2000-10, as the report notes at the very outset. In other words, since France entered the eurozone, instead of benefitting from the greater trade opportunities, it has become more closed off—a true paradox that highlights the sustainability of the single currency in the absence of drastic reforms. It is not a coincidence, the fund duly notes, that the correlation between the French GDP and the global economy has weakened. In this context, it further adds, French multinationals have managed to maintain a competitive price level abroad, but at the cost of reducing profit margins, thereby compromising their respective capacities for investment.
While the IMF had hoped for a “competitiveness shock” reform package, Paris has responded with selective and incremental measures to be put in place gradually. On the whole, the Hollande presidency has yet to put forward a convincing reform agenda. And yet, experience teaches us that the first months of government are the most fruitful in terms of reform.
In 2012, France ranked 34 in the annual ranking of the ease of doing business compiled by the World Bank. This was a drop of two spots compared to the previous year. Though France ranked higher that Spain (44) and much higher than Italy (73), the country is quite a few places behind other eurozone countries such as Finland (11), Ireland (15), Germany (20), Estonia (21), Austria (29), Portugal (30), Netherlands (31), and Belgium (33).
Clearly, the IMF report will not go unnoticed among those German political circles already in dismay with what they perceive as a lack of commitment by France to a broad-ranging reform agenda. The “contract” that Germany implicitly undersigned with France (and with Italy)—so say some in Berlin—was for the former to give up its own monetary sovereignty in favor of the common currency and in exchange for the benefit of greater trade and economic opportunities in the reformed economies of the eurozone.
Instead, during the period 2000-12, the share of German exports in the countries of the eurozone diminished by more than 7 percentage points. That towards emerging economies (Brazil, Russia, India and China), on the other hand, increased by the same amount. According to Goldman Sachs, by the end of 2020, the shares of German exports in the eurozone economies will diminish by almost 12 percentage points, while those in emerging economies will increase by 20 points.
What to do? Some policymakers are asking in Berlin. A lot will depend on whether or not the shockwave imposed on Italy and Spain in the last year and a half continues to bear fruit in terms of reforms. If so, demands for Germany to retract the implicit “guarantee” that has so far spared market pressures on France may gain ground again in Berlin. If that happens, the near future could hold a new, unseen chapter for the euro crisis.