Stimulating The Public Sector, Suffocating the Private Sector: A French Dichotomy

Wolf Richter's picture

Wolf Richter

Moody’s, when it stripped France off its AAA rating on Monday, had a laundry list of laments: “sustained loss of competitiveness,” “rigidities of its labor, goods, and service markets,” “deteriorating economic prospects,” uncertainties in the fiscal outlook, reduced ability to resist shocks emanating from the debt crisis....

A reflection of the granular details that have been seeping from every crack of France’s picturesque veneer: relentlessly rising unemployment, declining production and orders, collapsing automobile sales.... Everything seemed to go south. Home sales through August dropped 17%, mortgage originations plummeted 30.5% through September and 45.8% in October. OK, the “zero-rate mortgage,” a taxpayer funded program put in place by President Sarkozy’s conservative government to prop up home sales was drastically limited last November, austérité oblige. Down-payment requirements have jumped, and young buyers without a lot of cash have lost access to the housing market.

You’d think France is in a depression. Even its neighbor is worried [Germany’s Fear And Desperation Leak Out]. Yet, third quarter GDP edged up by 0.2%, after a decline of 0.1% in the second quarter. Mere stagnation since the second quarter of 2011. What gives?

Spending by France’s central government makes up 56% of GDP. Regional and local governments also spend voluminous amounts on various services, construction projects, subsidized housing, art installations, and other essentials. Combined, they make up a much larger portion of the French economy than the 56% of the central government alone.

In addition, the central government owns all or large chunks of important companies, even after nearly two decades of privatization efforts. For example, Renault was privatized in 1996, but the government still owns 15.7%. France Telecom was privatized in 1998, but the government still owns 27% and gets to appoint the CEO. Air France was privatized in 1999, but even after its merger with KLM, the government still owns 18.6% of the group. And it owns other companies outright, such as EDF, a mega utility that owns all of France’s 58 active nuclear reactors, or SNCF, the national railroad with a quarter million employees.

The extent of government ownership determines how these companies react to the ups and downs of the economy. While it’s difficult for Air France to trim its staff, it has done so. But it is next to impossible for EDF or SNCF to do so. Political pressure simply wouldn’t allow it during times of high unemployment. So when the economy goes into a tailspin, these companies don’t react to the same extent that purely private companies do. It’s an old deal in France: they can count on the government for financial support and protection from competitors; in turn, they provide growth.

The bloodletting has been happening in the private sector. But with its relatively small footprint in the economy, its difficulties are not well showcased in GDP numbers, which are dominated by the massive and complex government apparatus and the enterprises it owns. With sufficient borrowing power and political will to run up deficits, that apparatus can essentially dictate economic growth, even if the private sector is struggling for air.

But the government—with an eye on what happened when bond buyers balked, as they did in Greece—is limiting increases in its outlays and is raising taxes. Hence, “austerity.” Well, in some areas. In other areas, it’s trying to solve economic shortcomings by law.

For example, youth unemployment. It now entraps 22% of all young people and over 45% of those without degrees. After exiting the educational system, only 60% find a job within three years; of those without degrees, only 30% do. For those in disadvantaged areas, such as the northern or eastern suburbs of Paris, the situation can border on the hopeless.

So Parliament voted to “create” 150,000 jobs for young people—100,000 in 2013, the rest in 2014. “Jobs of the future,” they’re called. €2.3 billion has been allocated. It has been tried before. It certainly helps some of the young unemployed. It might even start a few careers. But there are drawbacks. Many of these jobs won’t produce an economic benefit and might evaporate when funding dries up. Others might compete with businesses already in that space, putting further pressure on the private sector. Nevertheless, it might be one of the better ways to spend €2.3 billion—given the desperation of the young unemployed, and the social unrest they might cause.

It’s a classic example of French dirigisme, of government intervention in the economy. It benefits a select group of people. And it benefits the government that must show that it’s doing something. But it doesn’t address the underlying structural problems that are suffocating the private sector, and that are pushing it to shed jobs in the first place. The very problem Moody’s was pointing at.

The debt crisis is exacting its toll in other ways. The convoluted undemocratic taxpayer-funded bailouts of bondholders and banks designed to keep the Eurozone together can’t seem to kick the can down the road far enough. The price has been huge. People have expressed their anger in massive protests. And it’s tearing up the fabric of the 27-member European Union. Read....  Sacrificing The Will Of The People On The Altar of The Euro.

And here is a hilarious video—even if you’ve already seen it—that, in 2:30 minutes, explains better than anything else the entire Eurozone debt crisis. By Australian comedians Clarke and Dawe

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
steve from virginia's picture


Hmmm ... leaves out as usual the FACT that France imports 98% of its petroleum to the tune of 1 million barrels per day. What does it repay with?


Borrowed euros. Buying fuel is the reason for the euro in the first place. It is an 'energy hedge' (that like all the others does not work any more).


Does anyone see a problem with borrowing to waste? What is a euro worth? What does it represent (cars). If Europe sells cars it is hammered by energy costs. If Europe cannot sell cars it cannot borrow!


Europe (obviously) cannot LEND to Europeans wanting to buy cars so selling cars and NOT selling cars BOTH mean Europe cannot borrow. Right now -- YOU guessed it -- Europe cannot borrow, it cannot lend, it cannot sell cars.


Making and selling cars is Europe's largest (only) business (beside decorating whorehouses). Europe is dying: this is the swan song of the (debt-dependent) European car industry.


Europe cannot borrow because it is insolvent ... it is insolvent because it cannot borrow. Who is to lend?


Truth is always funnier than fiction. The oil valve is being turned off in Greece when it's turned off in France the collective howl will be heard across the Atlantic Ocean.


Wait until it's turned off over here. There is a REASON why the US govt agencies are buying hundreds of millions of rounds of hollow point ammunition: Americans LOVE their cars. No gas = Revolution, baby!

THE DORK OF CORK's picture

Not a fan of these high speed lines but they are very very capital intensive operations.

3 are at a high tempo of operations now.

THE DORK OF CORK's picture

A look inside the other "French" bus company.......


The town of Annonay has had a long and interesting industrial tradition


When you take wages out of the equation (return of the franc ) France still has major industrial advantages over the BRIC & PIig world.

Consumption: 7,500 kWh/year (± 30%)   France

€ 0.1279 per KWH


€ 0.1419  (cheap coal ?)

Italy        € 0.2485  (nat gas elec power !!!!!!!!!!!!)


Kobe Beef's picture

Why don't they deport most of the unemployed "youth"? They're not french.

Fill in the blank:

"Diversity is our ..."

woggie's picture

the beast is on the gobble and all that matters is we're all headed for it's belly

THE DORK OF CORK's picture


The city of Dijon has struck the correct balance of public transport and protectionist investment which sustains domestic demand and keeps the domestic skill base.

(this is the biggest hybrid bus order ever in France)

Bordeaux had also made a smaller order ......they are 388,000 euros  a piece !

This will complement Dijons tram network which began operating in september with the other line operational before the end of the year.

Thats a big investment in a small /medium sized city.


Although for the most part a broken country destroyed like the rest of Europe by a brutal Hanavorian elite it still has some ancient reflex nation state responses to the crisis.


THE DORK OF CORK's picture

Please remember this is not a classic keynesian response when looked at from a european distance - they must strip other euro countries of capital to sustain this.

But their investments are really smart because if they truely print money in the future , this (Franc ?) money will easily flow into tram tickets without a inflation shock.


disabledvet's picture

interesting thoughts from the "commanding heights." in the USA the struggle for the States are "they can't print dollars." And neither can Wall Street i might add....though Wall Street would never admit that of course. (that's the Government now monetizing, not Citigroup.) So we monetizie "ye olde fashioned way" now: oil out of the ground and in the tank. I think France et al are discovering the real conundrum of being a "euro bloc": namely the "loss of sovereignity is real." No way to devalue? For Portugual? I think that's CRAZY. And here in the USA the claim is that "all the cash is sitting in the Banks not doing anything." REALLY? What if all that money is "waiting" for something? OUT OF FEAR. Cash might burn a hole in a consumers pocket...but not a bank's. Putting a choke hold on yields might feel good "to the authorities"...but that is a return on money itself. And the markets have clearly responded en toto by saying (save for equities) "we want a return OF our capital." this me. Are we stranding TRILLIONS in capital here? "I think i understand the fear" i guess is what i'm saying.

THE DORK OF CORK's picture

Wolf :

"But it doesn’t address the underlying structural problems that are suffocating the private sector, and that are pushing it to shed jobs in the first place"

Ehhh ...that would be a lack of Francs

But as long as it can extract capital (diesel really) from the PIigs France will stay within the eurozone

Zero Govt's picture

Govt "creating" 150,000 youth jobs for €2.3bn ...what a tragedy, they're building the Titanic and the iceberg to go with it.

Govt: man doesn't get dumber than this

THE DORK OF CORK's picture

  1. Its the rail and tram fixed capital investment which is keeping it afloat – even in real terms its as big if not bigger then the nuclear investment of the 70s or 80s although less effective then power plant substitution as oil is so very difficult to replace.

    Their will be 3 tram extensions in Paris alone before christmas , 2 are operational already.

    Lyon T5 got going the other day…………….

    All these construction projects add up ……………..


orangegeek's picture

Wake me up when France collapses.  Endless stories of Euro handouts, not limited to France, has put these monarchies, now socialists where they are today.


Somehow, they seem to keep afloat.

Ghordius's picture

the best part of this article is the the by-now old and hilarious sketch 

Eurozone debt crisis. By Australian comedians Clarke and Dawe

I particularly like the answer to the last question: "and why is the US economy stronger?"

otherwise just typical testosteronepit

disabledvet's picture

explain to me again "how do i buy land in Europe, surround it with barbed wire and put a bunch a stinky, fat and farting cows on it" again.

falak pema's picture

do u think his book sells better 'cos he beats the euro bash drum harder and harder?

Maybe I should be more of an outright shill and get one track minded instead of being "charybdis and scylla" in my analysis.

When you see BI saying : The great legacy to the WEST by GWB when he invaded Irak to liberate it, thus making the 6 million BPD production possible for exports to west it makes you wonder how these guys can look themselves in the faces and forget 1 to 2 million dead, Abu Ghraib and all the rest; to bring oil production in Irak back where it was under Saddam under surrogate Kurd control! 

The hype now is it hits 6 mmbpd by 2020; another pipe dream to deplete arab based oil. 

LetThemEatRand's picture

Which U.S. companies does China own?  There's nothing to see here, move along.  It's Western Socialism that is the problem. The wealth transferred from millions of humans to a few oligarchs by the displacement of middle class jobs to China is coincidental, and the result of too many unions.  Productive.  Classy.

disabledvet's picture

I disagree "LetthemeatRand." there is MUCH to see. If the price of an acre of Iowa farmland increases to say...$15,000 an acre...there is VERY much to see indeed.

LawsofPhysics's picture

Some land around our operations in Tennessee has already surpassed that price per acre, just a head's up.

Another bubble in my humble opinion.  we have been here before and the thousand mile "field-to-store" model is not sustainable.