PARIS – France is gravely ill. So ill, in fact, that Standard & Poor’s recently cut its sovereign-credit rating – the country’s second downgrade in less than two years. The decision was accompanied by warnings that the budgetary and structural reforms that President François Hollande’s administration has implemented over the last year have been inadequate to improve France’s medium-term growth prospects. Now, the pressure is on for structural reforms covering everything from labor markets to taxation.
While the S&P downgrade was unexpected, it was not exactly shocking. The recent downturn in France’s industrial output has created large trade deficits, and is undermining the competitiveness of small and medium-size enterprises. Unemployment stands at about 11%, with a record-high 3.3 million workers registered as jobless in October.
At the same time, political crisis is impeding the government’s pursuit of difficult reforms. French leaders have demonstrated an inability to communicate effectively or apply past experiences in analyzing current threats. Instead, they are resorting to diversionary tactics by engaging in overblown rhetorical battles about minor controversies. But they cannot ignore their problems forever, and the consequences of delaying the reforms that France needs could be catastrophic.
And yet, viewed from a broader perspective, France’s problems are largely symptoms of a disease that is affecting the entire global economy (including the European Union’s southern members). In recent decades, unfettered capitalism has produced significant mutations worldwide.
For starters, industrialism has become obsolete. In the advanced countries, the market for first-time purchases of mass-market goods like cars, refrigerators, and televisions is saturated, while the secondary market for used and reconditioned goods has become much less dynamic, undermining employment in repairs and renovations. With no industrial good that still requires a large-scale labor force – and the communications and services industries unable to fill the gap – employment is shrinking and economic growth is stagnating.
The second mutation stems from excessive shareholder dominance, which has been on the rise for more than three decades. Gathered into pension, investment, and hedge funds, shareholders can place considerable pressure on companies to extract dividends, using performance-based bonuses to gain executive support for their preferred policies. This has led to excessive workforce externalization, high rates of CEO turnover, takeover bids, and restructurings of all kinds – all which have far-reaching consequences.
In OECD countries, the share of salaries in GDP has fallen by about ten percentage points, on average, to roughly 57%. Cumulative figures for the last 30 years vary from $200-300 trillion. For this reason, consumption – the main driver of economic growth – has stagnated since 2000, while unemployment rates have risen almost everywhere, creating instability that affects even those who still have jobs.
Capitalism’s third mutation is the extreme financialization of economies and societies. Financial and industrial managers are compensated at a level that most of the world would struggle even to imagine. And the unrestrained expansion of financial markets, notably the proliferation of derivatives, led directly to the crisis that engulfed the Western banking system in 2007-2008.
Governments, in order to contain the fallout of the crisis, ran up public debt, including in countries whose balance sheets had already been weakened significantly by declining GDP growth. In many countries – particularly in Southern Europe – bleak economic circumstances are generating social tension, political apathy, civil unrest, and delinquency. The persistent specter of climate change only compounds public anxiety.
This is obviously not the ideal environment for France – not to mention the struggling economies of Southern Europe – to implement difficult structural reforms. But, by changing its economic doctrine, Europe can improve its prospects considerably. Instead of remaining on the German-led path of orthodoxy – which, through counter-productive austerity and deflation (forcing down domestic wages and prices), has turned stabilization into recession – Europe must develop a growth-based strategy to overcome the crisis once and for all.
Many economists, including the Nobel laureates Paul Krugman and Joseph Stiglitz, advocate precisely such a policy change for Europe. Only by heeding their recommendations, and demonstrating a shared capacity for – and commitment to – long-term thinking, can France and its troubled southern European neighbors finally begin to recover enough strength to do what they must for their long-term health.
Copyright Project Syndicate
Michel Rocard is a former French prime minister and a former leader of the French Socialist Party.
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