2 March 2025

“Plus ca change” is a French adage loosely meaning “the more things change, the more they stay the same”. To be sure, France enjoys an enviable socio-economic model: producing high levels of productivity and living standards combined with a strong commitment to equity and sustainability. Indeed, I have just returned from an trip enjoying the culinary delights of Lyon and the alpine beauty of Grenoble.

However, times are changing in Europe. Indeed, we appear to be entering an era featuring rapid technological innovation and a Trump Administration whose commitment to European security is less reliable. Meanwhile, however, the French model has proven to be unable to respond successfully to the recent economic shocks posed by the Global Financial Crisis (GFC) and the Covid pandemic.

If France aspires to provide political leadership in Europe during this period of change and to end its recent economic malaise, things can no longer stay the same. And, French financial markets have reflected the nation’s economic underperformance: the CAC40 has lagged the German DAX and EuroStoxx by 36% and 18% respectively during the past three years.

To be sure, France has numerous economic strengths to build upon. Nevertheless, significant alterations to its socio-economic framework leading to greater economic flexibility will be needed. Similarly, to counter the growing popularity of the far-right National Rally Party, the centrist political establishment urgently must deliver the required adjustments. The recent drama over the 2025 Budget — leading to PM Michel Barnier’s resignation and a watered-down 2025 plan — suggests the French public may not yet be ready to embrace the necessary changes. Plus ca change, indeed.

Boosting Productivity: The Key Ingredient

Rightly, Germany’s recent economic woes have received considerable attention. However, France’s performance has not been much better. Indeed, since both the GFC and Covid, French GDP growth has lagged even the underwhelming EU performance. Even more striking has been the underperformance relative to the USA and key northern European neighbours, e.g. Switzerland, Holland, and Scandinavia (Chart above).

Weak productivity growth lies at the heart of this problem. To be sure, all advanced economies have experienced slower efficiency improvements in recent years. However, French output per hour gains again have lagged the EU average, USA, and most key European nations, including Germany (Chart above).

The Chart above highlights the challenge ahead. Productivity weakness has been especially pronounced in the French manufacturing sector. However, efficency improvements have stagnated in service businesses also. The inflexibility of France’s economy has limited its ability to absorb external shocks and to take advantage of new opportunities. In the coming period of rapid economic change, productivity performance will be key to maintaining competitiveness and improving living standards.

Public Finances: Debt Challenges Social Model

To respond to these challenges, governments in all countries will need to efffectively mobilise public sector resources. France, however, enters this period confronting high and unsustainably rising government debt (Chart above). With the noteable exception of USA, French public sector finances are in a far worse state than its key competitors.

Likewise, France’s projected 2025 budget deficit of 6% of GDP is twice the Eurozone average, and even worse compared to Germany and other northern European competitors. French government spending’s share of GDP is the highest in the OECD (Chart above). Likewise, taxes exceed all other nations except Denmark. Putting the nation’s public finaces on a sustainable trajectory likely will require an unpopular shift in the nation’s economic model. In particular, even compared to other high-spending EU countries, 80% of the gap in French government outlays are for social expenditures (especially pensions and health care). Much of the remaining difference reflects higher public sector pay: government employment is nearly twice as high as in the USA.

Despite President Macron’s efforts to curb spending, e.g. raising the retirement age for pensions etc, these changes have been hugely unpopular politically. Ask Messr Barnier. Furthermore, successful fiscal consolidation, if it were to occur, could be a GDP growth headwind in the near term.

Industry & Tech: Opportunities and Headwinds

A high investment rate is another essential building block for healthy economic and productivity growth. Fortunately, France’s capex ratio is in line with other European and US competitors (but trails Asian eonomies). Likewise, R&D outlays are near the EU average, although they lag USA, Germany, Scandinavia and Asian rivals by a large margin (Chart above). As technological innovation and investment are key ingredients in boosting productivity, France’s ability to attract venture capital is an advantage compared to most of Europe. But, again France lags well behind the USA (next Chart).

Despite these relative advantages, French manufacturing efficiency growth has slowed sharply, and lags the US and European counterparts. France’s lack of innovation and failure to disseminate digital technology has been central to its economic underperformance in the internet era. Indeed, the usage of digital technology in both large firms and SMEs is amongst the lowest in Europe, and again lags the USA and Scandinavia enormously (following Chart).

In addition, France’s very high corporate tax rate hurts profitability, impedes innovation, and limits job creation (next Chart). With large government deficits requiring social spending cuts, reducing business levies and boosting public sector R&D spending may be politically difficult.

In addition, unlike other European nations, French corporate debt levels have surged during the past two decades. The need for corporate deleveraging may be a headwind to France’s efforts to improve flagging manufacturing efficiency (next Chart).

Service Sector: Slash the Red Tape

Meanwhile, service sector efficiency gains also have been lacklustre for over two decades. Indeed, while productivity improvements in this area have been in line with the EU average, France lags well behind the USA and United Kingdom. Again, the failure to innovate in the rapidly-growing tech sectors has been an important factor in the underperformance (next Chart).

Without doubt, over-regulation of these key economic sectors has limited innovation and prevented firms from responding to new opportunities. Indeed, restrictions on service businesses are dramatically higher than in Switzerland, Scandinavia, Holland, the UK, and USA (next Chart). Slash the red tape!

Labour Market, Education & Immigration: Reform Needed

The French social model also has a profound impact on the labour market and employment prospects. In addition to extensive regulations aimed at improving job security, high social security and labour taxes provide considerable disincentives to hiring (next Chart).

As a result, French unemployment rates are consistently above the OECD/EU average, and the gap is especially pronounced amongst young people, women, and older members of the work force (next Chart).

Reforms to the educational system could help improve job creation and productivity. On the one hand, French spending on education — especially at more advanced levels — is considerably above the European average. However, the return on this investment needs improvement, as educational outcomes (PISA test scores) are merely in line with European levels. Likely a considerable “skills gap” exists between what employers seek, and the abilities of new graduates.

On the other hand, relatively favourable demographic trends are amongst France’s economic advantages. Indeed, France’s fertility rate remains high compared to many key European nations, and the native-born population continues to grow (Chart above). Along with increasing female participation, France’s comparatively higher birth rate will add to the future workforce.

Despite its potential to expand the labour force, immigration is France’s top political issue, as it is virtually everwhere. Personally, while I focus on migration’s positive attributes, French political centrist parties must respond to the electorate’s demands to curb the inflow of foreign workers. Immigration can play an important role in coping with labour shortages in many key sectors. And, the Chart above illustrates immigrants’ proportion of France’s population is not especially high (although the share of migrants from non-EU nations is above the Europen average).

Climate Change: Well Positioned to Meet the Challenge?

Sustainability and low GHG emissions also are amongst France’s positive building blocks (Chart above). However, formidable challenges remain in achieving the nation’s climate objectives. Indeed, France’s enviable track record on carbon emissions relies fully on nuclear power’s dominant role in the nation’s electricity supply.

Indeed, French energy efficiency — the amount of energy consumed per unit of GDP — is not particularly good. In addition, even though the share of renewable energy sources is expanding, it remains low compared to other European nations (Chart above). Likewise, while the sectoral breakdown of France’s GHG emissions reveals progress in most areas, transportation (the largest source of CO2) has failed to make consistent headway (next Chart). Large climate-related investments remain necessary, especially in electic vehicles and renewables. With government budgets stretched and corporate debt elevated, however, delivering these expenditures may be challenging.