French have expected 'fiscal slap' for some time
Published 21/11/2012 | 05:00
Credit ratings agency Moody's decision to downgrade the creditworthiness of France has been a long time coming.
While the French government appeared relaxed yesterday, the reality is that the French have known for some time that the loss of the treasured AAA rating was on the cards.
All manner of organisations, domestic and foreign, have complained in recent years that the French labour market is too rigid.
The IMF began a report earlier this month with the words: "As financial stability risks abate, and with the prospects of a gradual resolution of the euro area crisis, France's competitiveness gap emerges as the main challenge for macroeconomic stability, growth, and job creation."
It was these same labour market rigidities that prompted Moody's analyst Dieter Hornung to make his rating cut earlier this week.
Yesterday, Mr Hornung blamed most of the downgrade on structural challenges and a "sustained loss of competitiveness" in the country where business leaders often blame high labour charges for flagging exports.
Moody's also complained about low levels of innovation, which continue to drive France's gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base.
The Paris-based Organisation for Economic Co-operation and Development (which supplied most of the information used in our graphic above) has also been critical of the French labour market for years, regularly highlighting problems that have knock-on effects for the rest of the economy. Perhaps the most forthright critic has been the IMF. The Fund, which is headed by former French finance minister Christine Lagarde, warned in its annual report earlier this month that rising tax rates are undermining France as a place "to work and invest" and leading to a "significant loss" of competitiveness.
The IMF report calls for "a comprehensive programme of structural reforms" and rejected the government's growth forecasts because of the country's "significant loss of competitiveness".
"(It) could become more serious if the French economy does not adapt at the same pace as its principal commercial partners, notably Italy and Spain, which, after Germany, are engaged in profound reforms of their labour and service markets," the IMF said.
Those warnings coincided with the release of a much-anticipated report by Louis Gallois, former chief executive of aerospace group EADS, who made what he called a "severe diagnosis of the decline of French industry".
Mr Gallois has made 22 recommendations to deepen investment, innovation and research.
His core proposal is the most controversial; to reduce France's high labour costs by cutting €20bn in social welfare charges borne by employers and €10bn in those paid by employees.
Whether the combined criticism of Mr Gallois, the IMF, the OECD and Moody's will be enough to wean the French from their fondness for security remains to be seen.
What is clear from this week's downgrade is that further cuts are on the way unless French President Francois Hollande pays heed to the many warnings from observers inside and outside his country.