The French Economy and the New Europe

THE FRENCH ECONOMY AND. THE NEW EUROPE By Jean-Pierre Landau .Let me, by way ofintroduction, make two basic points about my subject, "The French Economy and the New Europe." First, in relative terms, the French economy today is a very good performeramong European, and more generally industrialized, countries. It stands second only to Japan for low inflationandgrowth,andhasdonebetterthanGermanyonbothgroundsinthe last two years. There is, ofcourse, one black spot, unemployment, therate of whichisamongthehighestintheG-7countries. Understandingthecausesand roots of French unemployment is critical to a fair assessment of France's economy, its present performance and future prospects. Is France's unemploymentacounterpartofitsgoodresults in inflation (inwhichcase wouldthe presentlow inflation be reversed once unemployment starts torecede)? Oris the unemployment a discrete ailment that has to be tackled separately? Second, the concept ofa "new Europe" is more difficult to define today than it was six or nine months ago. Within the European Community (EC) itself, theroadtoMaastrichthasprovedrockierthanexpected, andturbulence within the European Monetary System (EMS) has given rise to doubts about its future evolution. Meanwhile, in Central and Eastern Europe, political developments such as the partition of Czechoslovakia (not to speak of the breakup ofYugoslavia) and the highly uncertain course ofeconomic reform, above all in Russia itself, make the future highly unpredictable. Nevertheless, as far as France is concerned, certain basic changes in its environment now seem certain or almost certain. Most of Europe will be organizedasadeeplyintegratedandopentradeandeconomicarea. TheSingle Market was fully implemented on January 1, 1993; agreements have been signed with member countries of the European Free Trade Association (EFTA) about a "European economic space." Negotiations for EC enlarge79 80 SAIS REVIEW menthavebegun. Countries ofCentral and Eastern Europe will increasingly be granted preferential and open access to West European economies. This economic integration will have two consequences for the French economy. First, there willbe alossofindependenceineconomicpolicy. This loss may sometimesbe asource offrustration athome, all the more sobecause itmay appearnotto affectothercountries tothe sameextent, andthus tocreate asymmetries among the EC countries. Most of the frustrations along these lines came into the open during the Maastricht referendum campaign. Still today, nervousness remains about subordinating French monetary policy to German decisions. This loss ofindependence will not only affect the state's macroeconomic tools, butalso its more microeconomic instrumentsofpolicy. Subsidies, technical standards and rules for management ofthe public sector will increasingly be subject to supervision from Brussels. A second predictable consequence for France of Western Europe's increased economic integration will be heightened competition and pressure foradjustment. Thepressurewill be all the moreintenseinthatcountries with low wages and qualified manpower—especially in Central Europe—will be active participants in the future European system. Apart from general economic integration, another characteristic of the newEuropewillbethepresenceofa"core" groupofcountrieswithpermanent very low inflation. That group originally evolved around Germany (with the Netherlands, Denmark, Austria and, more recently, Belgium). The situation ofFrance vis-à-vis that group is singular. France has certainly graduated into the club (and indeed, as I said, its performance is better than most ofthem). France, moreover, is committedto staying, through the signature andratification ofthe Maastricht Treaty. But the "marriage" will be consummated only withreal monetary union, achievable in 1997 at theearliest. In the meantime, theremaywellbestrongpressures, internalandexternal,tochangetheoriginal Maastricht strategy. Further, there exist other member states in the south of Europe which do not yet have the same low-inflation performance but, according to all appearances and public statements, shouldnot be leftbehind. Takentogether,thechallengethatconfrontsFranceinthefutureistocope with the increased pressure to adjust if it remains determined to be a low-inflationcountryandamemberofagroupofstrongcurrencies. Assessing French chances to meet such achallenge requires first looking atthe past and present situation of the French economy. That look, in brief, suggests that France is, in fact, well equipped to meet such challenges, but success cannot be taken for granted. From this perspective, I will then try to look into the future. THE FRENCH ECONOMY AND THE NEW EUROPE 8 1 The Past Experience FrencheconomicexperiencesincetheSecondWorldWarcanbeloosely characterized as falling into three phases. Phase 1. Economic Growth in the 1950s and 1960s. It is particularly worthwhile to look back to the 1960s, because it was at that time that serious problemsdevelopedwithFrenchgrowth;furthermore,theexperienceofthose problemsshapedpolicy-makingforalongtimethereafter. From 1955to 1973, the French economy displayed very stable features. First, growth was strong (neverlowerthanthreepercentayear)and,alongwithhighgrowth,unemployment was non-existent. Inflation was slightly higher than in...