France Economic and Financial Policy Part II

France Economic and Financial Policy Part II

The priority initially accorded to the employment problem was followed by a plan of interventions which, in reality, did not deviate much from the guidelines already outlined by the previous governments. The measures adopted – which provided for subsidies and cash prizes to companies in exchange for new hires, the taxation of social security contributions, the spread of temporary work, the reduction of weekly working hours, the encouragement of part-time work and other measures labor market deregulation – they were soon downsized,18, 6 to 22, 6 %), and decidedly disappointing in terms of the creation of new jobs.

On the public accounts front, on the other hand, the government’s efforts focused in particular on the restructuring plans of some sectors of the public administration (such as railways and air transport) and above all on the proposed reform of the social security system, whose deficit was considered one of the main causes of the high level of public debt.

Juppé’s reform plan, presented in the autumn of 1995, had two objectives: the elimination by 1997 of the social security deficit, which went from 15 billion francs in 1992 to over 60 billion in 1995, and the extinction within thirteen years of the enormous accumulated debt, which in 1995 had exceeded 300 billion francs. Among the measures to be taken are included: the introduction of new control procedures in health care costs, the increase of years of pension contributions from the original 37, 5 to 40for the public sector, the taxation of family allowances, the introduction of a new levy (contribution sociale généralisée) to replace the employees’ contributions, the increase of 0, 5 % of income tax. Affecting all social groups in a generalized way, the proposals of the reform plan aroused widespread discontent, which later resulted, in December 1995, in a series of massive street mobilizations. The onset of strikes convinced Juppé to abandon the pension reform program, to review the plan for the reorganization of the health and social security sector and thus to reformulate the quantitative objectives of the plan.

According to, the failure of the pension reform initiatives and the emergence of a ‘mini-recession’ in early 1996 – largely due to the strike wave of December 1995 – re-proposed the urgency of fiscal consolidation and pushed the government, up to that moment still uncertain about the ‘European choice’, to concentrate efforts on adapting to the parameters required for entry into EMU. However, this choice did not translate into an organic plan of interventions, since the only significant measure adopted was the freezing of salaries and public spending, brought back to 1995 levels.. However, the government managed to drastically lower the budget deficit by resorting to some accounting tricks, such as the takeover of the pension funds of the company France Télécom, at that time undergoing privatization. This operation, also contested by the Commission of the European Union, allowed to transfer to the state budget tens of billions of francs and to bring the government deficit ratio to GDP at 4, 1 % at the end of 1996. With regard to monetary policy, the orientation of the Central Bank of France remained in line with the objective of the strong franc. Therefore, despite the significant drop in the rate of inflation (now at ‘ 1, 8 % in1996, although slightly up compared to 1995, following the VAT increases decided in that year), the monetary authorities continued with the policy of rigid control of the monetary aggregates, allowing them to grow only in response to interest rate cuts of interest that the Bundesbank started starting from the second half of 1995.

In 1997, the French economy recorded a new pickup (2, 3 %), mainly boosted by growth in foreign demand. The strengthening of the dollar against the mark and the franc has restored competitiveness to French exports, allowing the formation of a large surplus on both the commercial and current side. The domestic demand remained largely stagnant: its weak variation (0, 6 %), however, has favored the descent rate of inflation which is carried on one of the lower levels (1, 1%) recorded since the 1950s. Given these positive results, however, it has occurred further increase in the unemployment rate at the end of 1997 reached 12, 4 %.

With the inauguration of the new government chaired by L. Jospin, in the spring of 1997, there was a change in the strategies, but not in the aims of French economic policy. On the employment front, the government has launched a three-year plan aimed at creating 700. 000 jobs (half of which in the public sector) funded largely by the state, and launched the proposal to reduce the working week to 35 hours for the same wage. The objective of convergence towards the single currency remained a priority, and the measures adopted by the government to contain the public deficit concerned the temporary increase in the tax rate on corporate profits, the increase in taxes on capital gains and the cut in public spending in the defense sector. The economic policy measures mentioned above and others concerning the provisions of some public companies have allowed France to join the group of countries participating in the single European currency since the beginning (January 1999). In 1998, GDP growth was quite strong, driven by the sustained increase in domestic demand. Inflation continued to decline and some positive indications emerged in the labor market: the unemployment rate fell again below 12 %, while employment increased by around 1.4 %, getting closer to the rates of the late eighties.

France Economic and Financial Policy 2