PODCAST: Relaunching the French Economy
The French government recently announced a 100-billion euro "France Relance" stimulus plan to revive the local economy from the impact of the COVID-19 pandemic. HEC Paris professor of Economics, Tomasz Michalski, analyzes the details of the recovery plan and its potential to restore the local economy.
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Will the plan to relaunch the French economy that was unveiled by the government on Sep 3rd work on top of the existing measures?
Tomasz Michalski: Let’s put it within the current economic context. France is getting back to work from vacation. Economic measures that sustained employment – e.g. furloughing workers – are coming to an end in most sectors. This may mean that firms that evaluated their situation during the last months, begin to fire workers if the economy does not rebound strongly. The return of the COVID-19 pandemic further clouds the picture. Consumers may still withhold purchases and increase savings because of precautionary motives. The economic hardship may lead to social discontent, and a return of the “yellow jacket” movement. Therefore some stimulus, coupled with reforms may be welcome.
The govt proposes 100bn euros worth of a stimulus, 4% of French GDP. There are 3 main points in the plan. Let’s go through them one by one. The plan is a mix of measures to stimulate supply, increase investment and employment.
First, tax cuts on production will help firms to weather better the economic storm, and potentially gain on competitiveness vis-à-vis firms in neighboring countries. This can also stimulate employment or slow down firing. This part of the plan is more like a fiscal reform that Macron wanted to implement for a while.
Second, various schemes that target “green transformation” – broadly reducing carbon emissions - will help to increase private investment and hence economic activity. Some will be in construction (insulating buildings), others in R&D (hydrogen fuel). The plan involves subsidizing innovation in industries that have high future potential but are difficult to implement without government intervention worldwide (because of scale, network effects etc.). They may benefit from creating so-called home market effects: the size of the local market may be important for the success of a product. This is a gamble that may create valuable and internationally marketable technologies.
A third pillar of the plan involves various measures to increase employment. Particularly interesting is subsidizing apprenticeships for young workers. This attempts to solve a long-standing problem of youth unemployment that is especially high in France among OECD countries, and which grew more acute during the pandemic.
An important aspect is that the stimuli will benefit firms of various sizes spread all across the French territory. The stimulus will affect small companies producing nontradables, and workers of different occupations. It can therefore reach people from different social strata all over France.
It is clear that it largely affects supply. The French government counts on the reported 100bn of household savings accumulated during the lockdown to materialize into purchases in the coming months without additional incentives. This stands in contrast for example to the German plan that lowers VAT and may have substantial international spillovers. Stimulus measures to sustain car manufacturers in the 2008-2009 crisis benefited many other countries that produced automotive components.
There are of course worries about the implementation of the plan. First, although 40% of financing will come from EU funds, it will add to the ballooning deficit and debt. Second, we’ll see whether the govt R&D incentives will translate in the long-run into new inventions. Third, its not clear how successful the employment stimuli will be in the current economic context: firms are reluctant to hire in recessions. However, this plan represents a different way of thinking about economic stimuli in France. Let’s see if it will work.