A rough message

WHAT is so bad about the French economy? Pierre Beregovoy, the French Prime Minister, blamed his government's defeat in the elections on Europe's recession, but viewed from Britain, France might seem to be weathering the recession rather well. The franc might be under suspicion, but the real economy has, at least until recently, been one of the better of the industrial world's performers.

Thus France had growth of 1.8 per cent last year and it had a small current account surplus; inflation is under 3 per cent and unlikely to rise much since wage growth is only 4 per cent. Public-sector finances are under control, with the budget deficit forecast at only a little above 3 per cent of GDP for the coming year. The cloud is unemployment, which is just over 10 per cent, roughly the same as the UK, and rising. On paper, the French economy looks in reasonable shape compared with the other large European economies. Yet the franc is under severe pressure, short-term interest rates have to be held at around 11 per cent, and as was evident over the weekend, the French themselves are deeply disgruntled.

There are two types of answer to this paradox of reasonable performance but serious gloom. One is sensible and rational. It runs along these lines. France's problem is that it has found virtue but as this has yet to be appreciated by the financial markets, she has yet to benefit from it. France has devalued its currency 14 times since 1945, and the markets reckon it will do it again. Yet by holding the franc against the mark instead of devaluing every few years, France managed to squeeze inflation out of the system. On all conventional measures France is doing better than Germany: relative unit labour costs are falling; the budget deficit is lower; the current account is in better shape. If anything the franc should be revalued against the mark, but because the markets have seen devaluations in the past, that is what they expect. Result: France has been unable to bring its interest rates below Germany's, as by rights it should be able to do, and voters have seen the pain of adjustment but not yet the benefits.

The other answer is more intuitive, and may be closer to the mood of French voters. It runs that France's economic position is much more precarious than the figures suggest. Demand has fallen quite sharply in the past three months. This is partly because of high interest rates, which are caning the property sector; partly because of the fall in demand from France's largest export market, Germany; and partly because of the devaluation of sterling, the lira, and the peseta. Unemployment is already high, and there is a grave danger that this fall-off in demand will push it higher yet. France is at a dangerous stage of the economic cycle, for the bulk of its recession is still to come.

It also faces more serious structural problems than are immediately apparent. While the country has done a good job of refashioning its industry during the 1980s, it has not been particularly good at reforming the new service industries, like finance or telecommunications. Most seriously, it has failed to reform its public sector. Social security payments are the highest, and the French public sector is proportionately the largest, of any EC member. Indeed the high social security payments that an employer has to pay before taking on new labour in some measure must be associated with the high unemployment levels. Since benefits tail off sharply after the first year, the welfare system, it could be argued, has tended to shift the burden of adjustment to those least able to bear it: France has one of the most serious long- term unemployment problems in Europe.

So in voting out its 'fiscally correct' government, the French electorate is not necessarily voting against economic restraint as such. People may partly be brassed off at the tough policies of the past seven or eight years, and they may reasonably feel that continued high interest rates are simply too destructive to be supported. But they may equally be seeking more structural change: less regulation, more privatisation, slimmer but more effective social services.

In many ways France's economic structure is more suited to the 21st century than that of its perceived rival, Germany. It has great strength in many luxury, or craft-based, products that cannot be made in the Far East. Japan can make luxury cars but it cannot produce champagne. France has great strength in many service industries, such as tourism. But it needs to impose on the public sector the sort of reforms it imposed on its industry during the 1980s. Maybe that is part of the voters' rough message.