France is in upheaval. Arguments erupt live on TV, demonstrations block the streets, strikes shut down plants, and threats of mayhem are part of the show [French Workers Threaten To Blow Up Their Factory]. The problem: an economy where businesses are suffocating under an obese public sector. Ever larger budgets have been the only source of economic growth. But now that model has run aground.
During the campaign last year, candidate François Hollande forecast that the economy in 2013 would grow 1.7%. Shortly after taking office, he shaved it down to 1.2%. Late last year, for the new budget, he chopped it to 0.8%.
And now that too has gone up in smoke. Foreign Minister Laurent Fabius guesstimated on RTL that growth would instead be 0.2% to 0.3%. And the goal of a budget deficit of 3%? It hasn’t been “abandoned,” Fabius said. But there’d be “a delay.”
The final vestiges of economic optimism are evaporating. Taxes have already been raised to absurd levels, and new tools are being implemented to crack down on tax fraud [read... Draconian Cash Controls Are Coming To France].
But the deficit still isn’t coming in line. Now the chopping block has been moved to the center. On it are child benefits. Instant hullabaloo.
Child benefits are part of a gamut of social benefits and subsidies. Parents of one child receive no child benefits. Once they have two children, they receive €127 per month. With four kids, they receive €452 per month. For each additional one, they receive another €162. A household with eight kids receives €1,100 ($1,500) per month in salary-like payments. And it’s tax free, regardless of income.
But there are drawbacks: a single mom with one child and a minimum-wage job receives nothing, while a wealthy household with two kids receives €127 per month; and it’s very, very expensive. Hence its sudden appearance on the chopping block.
Three options have been mentioned: include child benefits in taxable income; reserve the benefits for lower-income parents; or cap the benefits for high-income parents. The prior Socialist Prime Minister, Lionel Jospin, had already run his head into that wall. Tumults in the street forced him to retreat.
In this context, the evening news on France 2, France’s largest TV channel, had an amazing report, amazing because it showed a well-mannered, articulate, well-intentioned and rarely televised meeting of government functionaries and elected officials that, unintentionally, displayed in a microcosm what is wrong with the French economy.
France has a shortage of daycare centers—up to 12,000 places in Paris alone, according to the report. When three places opened up at the in-house daycare center of the Hôtel de Ville (City Hall) in Paris, 16 families applied. So 13 elected representatives and bureaucrats—some of them doctors and childhood specialists—sat around a conference table. The director of the daycare center, after meeting with the families, had put together a dossier on each case. Hours of work. Now she was presenting the dossiers. The 13 people weighed pertinent aspects and carefully arrived at a decision. It took nearly two hours—26 man hours (not counting the many hours put into it beforehand), paid for by taxpayers, to decide which three children should be able to enter the government-owned daycare center.
But where the heck was the private sector? Not a single word. Despite a shortage, and hence demand. No one even seemed to think about it. Certainly not the reporters of government-owned France 2. The private sector simply didn’t enter into the equation—though entrepreneurs creating daycare centers for 12,000 kids in Paris alone would have stimulated the economy in numerous ways.
“We have a major, massive, heavy problem that has never been dealt with until now,” lamented François Bayrou, presidential candidate of the centrist MoDem, “which is, our country has abandoned the force that it had, the force of creation, of enterprise, of production. If you don’t produce, you don’t have new products, new services, innovations, things to sell.” France has abandoned the private sector.
He estimated that growth in 2013 would be “zero, at best.” And the lofty growth forecast during the campaign? “As always during an election,” he said, “they tell the French things that are illusions and lies.”
But instead of falling for the latest fad of blaming German Chancellor Angela Merkel, British Prime Minister David Cameron, Europe, globalization, or other specters of the French economic nightmare, he said, “The problems of France are French.”
And so, the French economic model with its domineering public sector is being put through the wringer. That these discussions are taking place is a positive, though whether or not they will lead to anything constructive, or just more government intervention—and more stimulus, for “a moment of euphoria,” as Bayrou sneered—remains uncertain.
Not everything in the Eurozone is falling apart, not even in crisis-struck Italy: Ferrari booked records sales and profits in 2012. As dazzling as its cars. Not a single cloud darkened the horizon. Except in Italy where sales collapsed. And in the rest of the world, where central-bank printer ink stained the records. Read.... What Ferrari’s Glorious Results Tell Us About The World.