C’est la vie. Such is life in the French Republic, where unemployment is high, growth is low, and government is big. Since the global recession the French economy has been on life support, burdened by the suffocating presence of government in the economy and labor laws that reward lethargy.
Thankfully, a new report by former aerospace executive Louis Gallois offers some good medicine. Commissioned by French President Francois Hollande, the report suggests that France needs some “shock therapy” to revitalize the economy.
Gallois’s proposal suggests that France has a serious competitiveness problem stemming from an extremely inefficient labor market, a huge government presence in the economy, and business rules that discourage growth:
The diagnosis is quite severe, with the decline of the French industry. A decline that has been worsening in the past 10 years. I suggest 22 main measures. First of all to stop this decline: support investment. This is what I call a competitiveness shock, a confidence shock.
The report comes on the heels of a contentious presidential election between Hollande and former President Nicolas Sarkozy. During the campaign, Hollande promised to increase government spending in the face of the debt crisis and raise taxes on millionaires to 75 percent. So the report must come as something of a shocker to the president, considering his campaign rhetoric. Who would have guessed small government, low taxes, and an efficient labor market could lead to growth?
Hollande seems content to ignore Gallois’s suggestions. He did indicate yesterday that he will continue to offer 20 billion euros in tax credits to French companies. But instead of cutting spending to make up for this lost revenue, he will just raise the value-added tax to 20 percent. Not very shocking shock therapy.