France fails again the exams. Kindly requested to sit in on Commission’s class

It seems that Mr Moscovici was expecting a more 'soft' approach towards France from Mr Juncker but luckily this is not the case. From left to right, Pierre Mocovici, European Commission responsible for Economic and Financial Affairs and Jean-Claude Juncker, President of the European Commission. Plenary session in Brussels - week 46 2014 - EP President Opening of the Plenary: 25th anniversary of the fall of the Berlin wall. Statement by the President.  (EP Audiovisual Services, 12/11/2014)

It seems that Mr Moscovici was expecting an even more ‘soft’ approach towards France from Mr Juncker but luckily this is not the case. From left to right, Pierre Mocovici, European Commission responsible for Economic and Financial Affairs and Jean-Claude Juncker, President of the European Commission.
Plenary session in Brussels – week 46 2014 – EP President Opening of the Plenary: 25th anniversary of the fall of the Berlin wall. Statement by the President.
(EP Audiovisual Services, 12/11/2014)

France gets once more under the microscope. Apparently the second biggest economy of Europe is il for the past couple of years in trouble. Given its enormous political power historically in Brussels L’Exagone was getting away with it for quite some time but it seems that now the time has come for drastic medication.

The Macron Bill

In a nation were the word strike and protest were invented French citizens are always eager to fight for their rights and most of all reluctant to change their status quo. There are ample examples of that in Paris’ daily routine, one of which took place last Wednesday at the French capital. It was the day that Manuel Valls, Prime Minister of France, announced the “projet de loi pour la croissance et l’activite”. Mr Valls presented the harsh economic reforms to come in the member state that just met its record unemployment level of 10.4%.

The Macron bill “Law on Growth and Activity” contains paragraphs like making firing personnel easier for the French employer, opening shops on Sundays and releasing the so called ‘closed professions’ like notaries and bailiffs. All this, according to Mr Emmanuel Macron, French Minister of Economy, will bring France back to sustainability and growth. To be noted here that he country’s exports fell by 13 percent over the past five years while public debt is estimated to reach 100 percent of the French GDP during the leap 2016.

After long protests and press sensationalism in the ‘birthplace of croissant’, just one days later, yesterday, someone at the Commission decided to hit the ‘publish button’ of a report on France. The 34 page report came from the Macroeconomic Imbalances Procedure (MIP) of the European Commission and is stressing France’s underperformance towards the macroeconomic targets set. The timing of the report is not at all accidental as the Commission had to justify the timing of the Macron bill but also send a clear message that if this bill fails then perhaps even a “troika like” mechanism could take over.

No time for pampering

Let’s go back to the Commission’s report now and read some major proofs that Europe’s second leg is shaky. The main ‘problem’ of the Commission with France is, apart from the staggering economy figures that deteriorate, the fact that reforms are not taken or implemented properly. In short, the French situation is bad, it is expected to get worse and on top of that proper medication is not taken. The scope of the report is to maintain the ‘French patient’ in life and show her how to recover.

All in all, it is well understood in Brussels that France is a special case. One can sense that from the ‘politeness’ the French matter is being handled. It is nothing to compare with Brussels’ harsh behaviour against the PIGS (Portugal, Ireland, Greece, Spain). The political power of the Exagone is evident as it is also evident that the French economy is the second pillar of the European Economy.

There is not time for pampering though now. The French problem needs to be solved asap otherwise we will soon fall into another European crisis, this time a much deeper one. Europe needs to support strongly and discretely at the same time while Mr Valls and his team need to implement and make the French citizen understand the value of the dear cost to take.

This is the only way to keep the carnivore markets out of France that otherwise would be a sitting duck for them. The example of Greece and the rest of the duck company is there and it still hurts.

The ‘French Report’

Nevertheless, this crucial report of the European Commission has received too small attention by the media as regards its details. We place here some excerpts for the reader of the Sting to be well informed about how supportive is Europe towards France. The major findings of the ‘French report‘ are the following:

– France’s economy has been stagnating for the last three years, with a quarterly GDP growth of 0.1% on average between mid-2011 and mid-2014.

– According to the Commission’s 2014 Autumn Forecast, France’s economic growth is projected to remain low in 2014 and 2015 at 0.3% and 0.7% respectively,

– The continuous deterioration of France’s export competitiveness is expected to weigh on the recovery.

– France’s recent price developments reflect external factors but also weak aggregate demand.

– As regards public finances, the general government deficit in 2013 stood at 4.1% of GDP. However, the headline deficit is expected to increase to 4.4% of GDP in 2014.

In addition, Tthe Commission’s report also gives recommendations on how to make it through. Moreover, it segregates the suggested measures in 3 major categories: public finances, cost of labour, growth and competitiveness.

1. Recommendations on public finances:

– France has consistently recorded high general government deficits, which have led to a build-up in public debt.

– The Draft Budgetary Plan and the Draft Programming Law for Public Finances for 2014-2017 postpone the correction of the excessive deficit to 2017 and the achievement of the MTO is now only foreseen by 2019.

– Public expenditure, which represented 57 % of GDP in 2013, has proved difficult to reduce.

– Most recently, the ‘Modernisation de l’Action Publique’ (MAP) aims at identifying expenditure measures in a longer term perspective. However, the savings generated by this spending review remain limited so far.

– The reform of local administrations is necessary.

– Potential gains from the creation of metropolitan areas are sizeable, but will crucially hinge on the final design and implementation of the reform.

– A rationalisation of the administrative organisation of the local authorities could enhance the efficiency of local expenditure in the medium-term depending on the final design and implementation of the planned territorial reform.

– Some steps have been taken to reinforce the governance of public finances by local authorities.

– Little has been done since June 2014 to improve the long-term sustainability of public finances.

– France has a high and rising overall tax burden.

– The Draft Budgetary Plan for 2015 contains some small first steps towards simplification of the tax system but also creates new tax expenditures contrary to the Council recommendation to simplify and increase the efficiency of the tax system.

– There has been little progress in the area of environmental taxation.

2. Recommendations on labour cost:

– France is among the Member States where the cost of labour is the highest.

– An ambitious package to reduce the cost of labour is being rolled out.

– The reforms implemented to reduce the cost of labour are expected to have a positive impact on competitiveness, although its magnitude is uncertain.

– Simulations carried out suggest that the benefits of this package in terms of employment creation could be substantial.

– However, the second evaluation report of the CICE shows a lower immediate take-up than initially envisaged.

– Moreover, the cost of labour at the minimum wage remains high.

– Despite a number of measures taken, policy action regarding the labour market remains incomplete. A reform of the conditions of the ‘accords de maintien de l’emploi’ to further reduce rigidity of open-ended contracts is not considered at this stage.

– Government plans to reform the Justice Prud’homale are welcome to reduce the cost and uncertainty related to long dismissal dispute procedures and, given the observed malfunctioning of the system, an ambitious approach is required.

– There remains an important cumulated deficit in the unemployment benefit system and the measures that have been adopted or planned so far do not close the gap.

– France has taken some limited additional steps to increase the employment rate of older workers but a more comprehensive approach is needed.

3. Recommendations on growth and competitiveness:

 – France has experienced significant losses in its export market shares since 2000 and is not regaining competitiveness at a sufficient pace.

– A simplification programme has started aiming at reducing the administrative burden and procedures for firms, but its scope should be broadened with a view to reducing more decisively the burden stemming from taxation and labour regulations.

– Social partners are negotiating to improve the quality and effectiveness of the social dialogue, which encompasses the recommended review of firm-size related social thresholds.

– A report of the ‘Inspection Générale des Finances’ (IGF) informs the ongoing government plans as regards the reform of regulated professions and highlights the potential benefits of the reform.

– Based on the report of the IGF, the government is preparing a reform of regulated professions and other economic activities, though with a much more limited scope both in terms of professions and types of regulations covered.

-The government has also announced a liberalisation of bus lines and a reform of Sunday opening hours.

– The recent simplification of authorization procedures for the opening of trade outlets is a step in the right direction, but its impact will crucially depend on how it is implemented.

– The reform of the rail network infrastructure management is a step in the right direction.

– Some further progress has been made to open up competition in the retail market for electricity and to increase interconnection capacity.

– Since June 2014 an evaluation of the ‘Crédit Impôt Recherche’ (CIR) has been carried out but no adaptation of the CIR is currently envisaged.

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