Thursday, April 17, 2008

French vs UK Economy

Readers Question: Does France Provide a Better Economic Model than the UK?

French / British Rivalry extends far back in time to the devastating 100 years war. These days national rivalries are mostly played through sport or Economic development. This essay takes a short look at whether the French economy is doing better than the UK.

Problems of French economy

Economic Growth 2001-2006. In the period 2001 -06, the UK economic performance generally exceeded its European counterparts. The French economy and Eurozone experienced sluggish growth as it struggled with a Common monetary policy and inflexibilities in the labour market. see: UK economy outshines its peers Source: BBC (note: the forecasts in this data were overly optimistic for the Eurozone)

Graph of French Economic Decline Compared to UK and US

Unemployment. Furthermore, it is argued that the UK benefits from lower levels of unemployment compared to our European counterparts, especially France and Spain.
For example, in 2007, ILO unemployment in the UK is 5.4%, in France, 8% Source
Anecdotal evidence suggests upto 50% of young people are unemployed, contributing to the riots of 2005.

Source: French flee stagnant economy at MSNBC

Labour Market Inflexibilities. It is argued a weakness of the French economy is rigidities in the labour market. Critics (such as the Economist) regularly point to inflexibilities such as a maximum working week of 35 hours and the difficulty of hiring and firing workers. It is argued that these restrictions deter investment and productivity growth. Also trades unions in France are more powerful and arguably have created labour market unrest, preventing necessary reforms.

Problems of Being In Euro. Being in the Euro means that countries like France cannot devalue the exchange rate to boost exports. The rise of the Euro in recent months is making French exports relatively less competitive and this could weaken French growth. Also the common monetary policy means that interest rates may be unsuitable for the French economy. The UK has greater flexibility to cut rates if the economic situation requires it. Recently, the Pound has weakened against the Euro providing a boost to the exporting sector, helping to offset the fall in consumer spending.

However, it is argued that the French economy is not as sickly as it is made out to be.

Strengths of French Economy

  • Growth is picking up, although it is still struggling to reach 2% per year. Forecasts suggest growth will remain below trend for quite a few years to come.
  • Unemployment statistics suggest unemployment in France is higher, but labour market participation ratios of 87% are the same as in the US. This suggests that unemployment figures may be misleading and not as bad in France as some claim.
  • French labour laws provide security and protection for workers. In the UK and US it is argued there are more part time / temporary/ low paid jobs.
  • There is lower child poverty in France (see Le Monde article)
  • Le Monde makes a strong case for the French economy - see: english translation
The French and UK Housing Market.

Arguably, the UK's housing market has been a key factor in generating higher levels of consumer spending and economic growth. As house prices in the UK start to fall, it will have a powerful effect on reducing consumer spending and lowering levels of economic growth. Furthermore, it is argued UK house prices are overvalued and could fall by upto 25%. This means that the strong UK economic performance of the past few years may start to unravel as a slumping housing market causes lower growth.

In France, the housing market is less important to the economy. The ratio of homeownership is lower; it is about 50% rather than 77% in the UK. The French economy is not quite as unbalanced. The UK economy is susceptible to a fall in house prices and it could lead to a recession like the last time house prices fell in 1992. France will be less affected by the subprime crisis, even if French house prices are still overvalued by up to 20%

Overvalued housing markets in France and UK


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