3 Economic Challenges for France

France is a modern country and a leader among European nations. The country's president, Emmanuel Macron, is the founder of the center-left Forward! Party and is the youngest president since the establishment of the Fifth Republic. The country's economy is diversified, and the leading industries are tourism, manufacturing, and pharmaceuticals. 

France is the second-largest economy in the EU after Germany and also the second-most populated.  However, it has maintained slow population growth since the mid-2000s.

France has struggled with high unemployment since the 2008 global financial crisis, as have other EU countries. But while unemployment has since improved for other European nations, it has continued to affect France's productivity and competitiveness.

1. High Unemployment

The unemployment rate in France, though improving in recent quarters, remains stubbornly high. In the fourth quarter of 2019, France posted an unemployment rate of 8.1%, which was better than the 8.5% registered in third quarter and the 8.8% notched in the year-ago period. France has the fourth-highest unemployment rate among European countries. Only Italy, Spain and Greece do worse. For workers 25 to 49 years of age, the unemployment rate was 7.4% in the final quarter of 2019, improved from the 7.9% registered in the third quarter. Workers over the age of 50 also did better. Their unemployment rate was 5.8%, compared with 6.3% previously.

Sustained high unemployment is a drain on the French economy because social safety nets that must accommodate the unemployed will grow and be supported by a smaller fraction of the populace. High sustained youth unemployment is especially worrisome because it stunts skill development and wealth accumulation of the generation that should drive the economy in future decades.

Macron plans to spend 15 billion euros on job training over the next five years and plans to increase sanctions against unemployed workers who do not look for work by reforming unemployment benefits.

Source: OECD Better Life Index.

2. Lagging Competitiveness

France has seen its competitiveness wane. The nation has run a current account deficit over the past decade, meaning that France imports more than it exports. In 2018, its current account showed a deficit of 15.1 billion euros, which was slightly better than 2017, when its current account deficit was 16.4 billion euros.

The Banque de France attributed the improvement to an increase in trade in services, driven by R&D and professional management services. However, France paid more for energy, which put pressure on the current account.

In 2013, France introduced the Competitiveness and Employment Tax Credit (CICE) to lower labor costs and help French firms become more competitive. In 2019, the CICE was scrapped and replaced with a reduction in employer contributions to social welfare programs.

Despite lower labor costs, many French manufacturers cannot find sufficient skilled labor to meet demand, which is hampering growth. Government reforms of apprenticeships and vocational training could help in this regard. 

Where France is seeing improvement is in foreign direct investment. While French firms are struggling to gain market share abroad, foreign companies are attracted to doing business in France, which has become more business-friendly since Macron assumed the presidency. In 2018, an estimated $37.3 billion of foreign direct investment flowed into the country, compared with $29.8 billion in 2017.

3. Sluggish Growth

In December 2019, the Banque de France expected 2019 economic growth to come in at 1.3%. The bank forecast growth easing to 1.1% in 2020 before strengthening in 2021 and 2022.

The bank said a deterioration in the global economy could weigh on growth, although strong domestic demand would provide support. Inflation would fall to 1.1% in 2020 on lower food and energy prices.

In the four-year period from 2016 to 2019, France added one million new salaried jobs, thanks to lower labor costs and other labor reforms. The bank expected wage tax reforms, unemployment benefit reforms, and vocational training to help in further job creation.

In February 2020, Banque de France said it expected industrial production and business activity to fall in most sectors as a result of the global coronavirus outbreak.