Undertaking the radical reforms demanded by the markets and the IMF is no recipe for economic success
Investors appear to have taken Moody's decision to downgrade France's credit rating after the markets closed on Monday night in their stride; but it has intensified the focus on the eurozone's second-largest economy, after the International Monetary Fund warned that the country must undertake radical reforms or face the fate of chronically uncompetitive Spain or Italy.
Finance minister Pierre Moscovici told reporters on Tuesday morning that Moody's decision was a condemnation of the Sarkozy government's policies, not an assessment of the Hollande regime's approach.
That's the classic, knee-jerk response of a new government Рbut the Hollande regime is right not to accept unquestioningly the markets', or the IMF's, prescription for so-called "structural reform" Рan anodyne phrase that can disguise wrenching social and economic changes better phased in over years than imposed at the stroke of a pen from the Elys̩e.
France may be losing ground against Germany, not least because of German workers' masochistic willingness to accept repeated cuts in their real take-home pay in exchange for job security. And there are deep problems with the insider-outsider culture in France that means kids growing up in les banlieues have little chance of breaking through into the economic mainstream.
But it would be a mistake to compare France's deteriorating current account – it has a deficit of around 3.5% of GDP – unfavourably with the "improvement" in Ireland, Spain or Greece. It's hardly surprising the current account deficit in these countries has shrunk – they've seen domestic demand collapse amid catastrophic recessions.
France still has ambitious industrial champions; and it's one of the few economies in Europe where there remains something resembling a social contract, instead of an atomistic free-for-all. Vintage French crooner Johnny Hallyday may have tried to become Belgian for the purposes of avoiding the Hollande government's swingeing 70% top rate of tax; but the bosses of many state-owned firms have uncomplainingly swallowed big pay cuts, in line with the policy of capping their income at 20 times that of their lowest-paid worker.
And Hollande is far from deaf to the complaints of industry that it's too burdened with social costs and strung about with regulations to succeed: his prime minister has announced €20bn-worth of tax-breaks for firms, after a report by ex-EADS boss Louis Gallois called for a national "competitiveness shock". France does need to reform — but it will be a complex, politically fraught process that should be carefully managed. Recent experience suggests heeding the advice of the IMF, let along the ratings agencies, is not even a recipe for economic success, let alone social or political harmony.
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