Youth employment and productive investment, notably in digital and the energy transition, must be top priorities, writes Bernard Spitz.
The rescue measures adopted last Spring by France and other European countries in order to shield households from the impact of the Covid-19 pandemic have served their purpose. Their disposable income was protected, which helped spur economic activity relatively quickly once restrictions on movements began to ease.
Although France’s GDP dropped by 19% in the first half of the year, compared with 15% in the Eurozone and 12% in Germany, consumption has since jumped and is currently higher than pre-crisis levels. As a result, French GDP for this year is now predicted to contract by 9% instead of 11% initially.
This is good news but it is time to change course and move away from this defensive approach. What France now needs is a bold, forward-looking recovery plan that invests in its future assets.
The country cannot afford to freeze its productive fabric any longer as it entered this crisis with a heavy public debt and a structural deficit. The French government predicts that France’s public debt will be over 120% of GDP in 2020, with a deficit of 11.5% of GDP for this year only.
Freezing the economy would also be economically inefficient since Covid-19 has been an accelerator of trends. We experienced a very rapid change in both consumption and working habits during the pandemic. In the US, it took ten years to bring the share of e-commerce in food products from 6% to 16%, and just three months to propel it to 26% so far this year.
In order to successfully return to growth in this new context, France’s recovery plan must have two priorities: youth employment and productive investment. The objective is to recover its 2019 GDP in 2022.
While the majority of households received government help during the pandemic, young people and independent workers – traditionally not well protected by the French social model – are very vulnerable. Young people have been hit hard as the job market deteriorated in the second trimester. The youth employment rate dropped significantly by 2.9 points.
Businesses have also been particularly impacted. According to Banque de France, a significant proportion of their losses linked to confinement (24%) still appears on their balance sheets. This has made them overly cautious, freezing all investments and recruitment of young graduates.
According to Banque de France and OECD, investment should fall twice as much as GDP in 2020. This worrying situation risks leading to a further deterioration of production capacities. French economy cannot afford to wait for six years to recover its initial industrial investment levels as it did following the 2008 global financial crisis.
As former ECB President Mario Draghi recently said: “The debt created by the pandemic is unprecedented and will have to be repaid mainly by those who are young today. It is therefore our duty to equip them with the means to service that debt.”
We should therefore make a distinction between “good” and “bad” debt. The former is there to help prepare for the future by investing in human capital, research and technology. The latter merely serves short-term political goals financed by the next generations at a loss.
In this sense, a bad recovery plan would include blanket support for demand in a classic keynesian way. This would only modestly boost activity while strengthening domestic savings which have already increased by €75bn since lockdown. This is why France should not lower VAT like Germany did. Nor should it finance current expenditure contributing to its structural deficit.
Conversely, a good plan would have a strong focus on fiscal and financial measures to encourage private sector investment. For instance, taxation on production must be scrapped. The injection of domestic savings in the economy should also be incentivised. Such a plan would also include targeted help for the most vulnerable sectors such as the hospitality industry, a programme of state reforms, and strategy to strengthen public finances in the medium term.
The size of the investment announced by the government (€100bn) seems appropriate but this should include at least €40bn of public spending.
The best way forward is to adapt the French economy to global productivity standards and to radical transformations in consumption habits, robotisation, and the energy sector. And an important component of future growth will have to be green.
Traditional sectors such as construction will also need substantial support beyond energy efficiency schemes through negative interest loans for instance. At the same time, strengthening social security measures to help cope with the loss of independence will be crucial, as well as the adoption of pandemic insurance. Last but not least, the government’s communication will need to strike the right balance between inciting a return to work and urging caution on health grounds.
Bernard Spitz is the President of French thinktank Les Gracques and is in charge of International and European Affairs at the head of MEDEF, the French employers’ organisation