France Market

France economy: On track to growth or in denial?

The factory floor of the steel plant in Florange is a hostile place to work but especially so this summer - the unions are waging war. On Monday they occupied the control room, shutting down what little production still remains. Their protest is in response to falling orders in Europe. The steel giant Arcelor Mittal has idled the plant's enormous blast furnaces. They say they will be restarted when business picks up - but the unions are not convinced. Steel is the backbone of the manufacturing industry - always a good barometer of where the economy is heading. This plant was once profitable but its future has been in doubt for some time, and that future is less certain with news that French output for August fell to its lowest ebb in three and a half years.

Promises
Before the election, Francois Hollande paid a visit to the industrialized region of Lorraine, promising to defend their jobs, Mr Hollande is underlining his commitment to fiscal responsibility with what he says is the toughest budget in 30 years. There will be 10bn euros (£8bn; $13bn) of spending cuts and 20bn euros of higher taxes, half of it for business. And that is just the start. If growth does not recover, the cuts will go even deeper. "I've asked my government to prepare a budget based on the real forecasts for growth," said the president. "We have revised our figure for 2013 from 1% to 0.8. I don't want people accusing us of using incorrect estimates." But some believe the forecasts are still overly optimistic.

In Mr Hollande's first four months in office there have been a slew of redundancies and, on top, three consecutive quarters of zero growth. Economist Nicolas Baverez, who has just written a book titled Reveillez-Vous (Wake Up), says France's economic model is no longer sustainable. "We are heading for recession," he said. "Public sector debt is almost 90% of GDP, annual state spending still accounts for 56% of economic output. "The budget does nothing to reverse this trend. There was an overspend in 2012 of 10bn euros, this budget will cut by 10bn euros. The effect is neutral. We need wholesale reform of the French social and economic model. This does the opposite."

In recent times French governments have blamed the eurozone crisis for the pallid colour of state finances. But France has not had a budget surplus since 1973. The social burden has been passed to the employer in the form of higher and higher taxes. Since France joined the euro, the unit cost of labour has risen by 28% - in Germany by just 8%.

In denial?
So does Trade Minister Nicole Bricq think it is time to reassess?
"I know the British like cutting taxes but we have to honour our commitments to cut deficits," she said. "We have made promises to our European partners and we will honour them. Competitiveness is a global concept. France probably has to work on becoming more innovative and enhancing our non-price competitiveness - more innovation means more exports."

There has been little sign that Mr Hollande's government is prepared to take the kind of radical approach to the public sector and the welfare state that Nicolas Baverez and many others advocate. "We have to acknowledge that in our French political class there is denial of the seriousness of the situation," says Mr Baverez. "It is a problem for France but very soon it could be the eurozone's problem too.

"If you add recession to debt, to structural unemployment, to declining output and the inability or reluctance to reform, you have all the ingredients for Spanish-style instability, and if this turns into a crash in 2013, there is a serious risk to the euro. "

On the windswept hills above Florange the unions have planted a giant neon sign with the three letters SOS. You can see it from the three steel towns that span the valley. But they are not the only industry that needs saving. Without meaningful reform, business leaders say French manufacturing will continue to sink. Friday's budget might be a start but Mr Hollande will need much, much more. And if Mr Baverez is right, the eurozone's future may depend on it.