Structural reforms are crucial for protecting social welfare

03.17.2023 4 min
Read my column published in the March 17th 2023 issue of "l'Opinion"

The concept of structural reforms is not well understood. Their purpose is, in fact, to boost a country’s economic growth potential, without necessarily lowering wages or social protection through austerity measures. It is important to clarify this distinction, as confusion can be detrimental to the discussion.

Why is it essential to increase France’s growth potential? Firstly, to lower the structural unemployment rate, which, despite recent progress, is still around 7 percent. The country also faces unacceptably high youth unemployment, at around 18 percent (compared to 5 percent in Germany). Secondly, increasing growth potential would help ensure a better financial position for the state, local authorities, and social security, which would lead to increased sustainability for social protection and pensions. There is no point in dissociating the financial question from the capacity to maintain a high level of social welfare.

Thirdly, France needs to seek competitiveness from above, which can be achieved through two possibilities: lowering the cost of labor and social protection via austerity policies – as was the case in Spain and Portugal during their debt crisis and the financing of their foreign trade deficit, during the euro zone crisis of the 2010s. Or, on the other hand, improving quality-price ratios of national products and services through structural reforms, such as developing added value and the range of production, notably through innovation. Public expenditure must also be managed efficiently to avoid excessively high tax rates, which could reduce competitiveness and employment and jeopardize the sustainability of social welfare. 

Germany has been successful in this regard since 2000, with reforms that have strengthened its competitiveness despite having one of the highest labor costs in Europe, through industrialization based on high added value. This resulted in a high trade surplus, a structurally low unemployment rate, and a relatively low public debt ratio.

France has a similar labor cost to Germany but needs to improve its production range and quality-price ratio, as it currently offers a low quality-price ratio. As a result, the country has a low level of industrialization and a trade deficit that is constantly deteriorating. France’s lack of structural reforms over the past few decades has led to an excessively high unemployment rate, one of the lowest employment rates among comparable countries (68 percent compared to 77 percent in Germany and Sweden or 82 percent in the Netherlands), and a high permanent budget deficit, resulting in an excessive and steadily rising level of public debt.

The potential growth rate of an economy is the sum of the growth rate of the working population and productivity gains. France needs to implement several structural reforms to increase the quantity of work, which is one of the lowest in relation to its population (610 hours of work per year and per inhabitant, compared to more than 700 in Germany or 750 to 900 in the Netherlands, Sweden or Portugal). This would help finance social protection for all and public services, so their level does not fall. A better functioning labor market is essential to achieve this, which would also put an end to the paradox of a still too high unemployment rate coexisting with a high proportion of companies unable to recruit as much as they wish, which constrains supply and growth and facilitates inflation.

Additionally, the employment rate needs to be raised by making it easier for young people to enter the labor market and by increasing the number of years spent at work before retirement, as neighboring countries have done. France has a very different employment rate at both ends of the life cycle, with about 35 percent of 60-64 year-olds employed compared to 62 percent in Germany or 70 percent in Sweden.

Education, both initial and continuing, must also become one of France’s strengths once again. International comparisons show that France’s training and education efficiency is decreasing despite a budget that is similar to or even higher than those of other European countries doing better in this regard (about 1 point of GDP more in France than in Germany). Here again, reforms are essential, even if the rise in the level of training can only be slow. The efficiency of education conditions the number of jobs as well as their qualification, which, in turn, influences the range of production and its quality-price ratio.

Finally, let’s not forget the reforms that enable productivity gains, which are essential for potential growth. France has made great progress in creating “tech” companies, and the Research Tax Credit (CICE) is a valuable example. However, it is important to note that the profit rate is a determinant of the amount of research and development carried out by companies. After being lower than neighboring countries for a long time, it has improved since the introduction of the CICE and the lowering of the corporate tax rate. 

In contrast, public spending efficiency remains far below what is desirable. Despite being on the podium of public spending rates (about 8 points of GDP more than in Germany, 9 than in Sweden or 13 than in the Netherlands), France’s quality of public spending (including social security) is only average compared to OECD countries and is perceived as decreasing. This high level of public spending also results in a tax rate that is almost the highest in the world (more than 6 points of GDP above that of the euro zone excluding France), which is a definite handicap to competitiveness.

On top of that, compulsory levies, although very high, do not cover expenditure, which leads to a permanent public deficit and a permanently increasing public debt relative to GDP. As a result, our growth is obtained at the cost of an ever-increasing debt ratio, which is ultimately unsustainable. Since 2000, public debt in the euro zone has increased by 25 points of GDP, while France’s has increased by 50, twice as much. In the early 2000s, France’s public debt ratio was identical to Germany’s, at around 60%. Today, it is about 110% in France and 70% in Germany. Reforming the State and local authorities, combined with reforming the social systems, would help maintain the high level of social protection for the French and prevent it from declining.

Efficiency and respect for each person’s duty towards the common good of social protection are not a search for the lowest social standards, but rather the only way to preserve what is valuable for all. Ignoring or denying the usefulness of structural reforms would be playing with fire.

Olivier Klein
CEO of BRED and Professor of Financial Macroeconomics and of Monetary Policy at HEC Paris