Economic Policies
#18Key Findings
Marked by ambitious spending and persistent protest, France falls into the upper-middle ranks internationally (rank 18) in terms of economic policies. Its score in this area has improved by 0.8 points relative to 2014.
The government responded to the pandemic with massive deficit-fueled spending, successfully supporting companies and minimizing unemployment increases. GDP plummeted by 9% in 2020. Nonetheless, growth surged back to a 7% rate in 2021, with the economy recovering to precrisis levels by that autumn.
Prior labor-sector reforms had begun taking hold by 2019, but the unemployment rate was still above 8%. After a small bounce in 2020, it returned to near 8.1%, with the number of unfilled jobs at a near-record high. NEET rates remain very high for young adults, however.
Taxes and social contributions are higher in France than anywhere else in the OECD other than Denmark. Public expenditure reached 61.8% of GDP in 2020, with deficits of 9.1% in 2020 and 8.0% in 2021. State debt reached 114.9% of GDP in mid-2021, facilitated by low rates of interest. The recovery programs did contain key measures favoring startups and innovation in general.
The government responded to the pandemic with massive deficit-fueled spending, successfully supporting companies and minimizing unemployment increases. GDP plummeted by 9% in 2020. Nonetheless, growth surged back to a 7% rate in 2021, with the economy recovering to precrisis levels by that autumn.
Prior labor-sector reforms had begun taking hold by 2019, but the unemployment rate was still above 8%. After a small bounce in 2020, it returned to near 8.1%, with the number of unfilled jobs at a near-record high. NEET rates remain very high for young adults, however.
Taxes and social contributions are higher in France than anywhere else in the OECD other than Denmark. Public expenditure reached 61.8% of GDP in 2020, with deficits of 9.1% in 2020 and 8.0% in 2021. State debt reached 114.9% of GDP in mid-2021, facilitated by low rates of interest. The recovery programs did contain key measures favoring startups and innovation in general.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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9
9
Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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7
6
7
6
Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
5
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3
4
3
Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
2
1
1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
France’s economic outlook is improving. Since President Macron’s election in May 2017, he and his administration have launched an ambitious reform agenda. Over the past two years, an impressive set of reforms (probably comparable in magnitude only to the 1958 – 1959 reforms undertaken at the beginning of the Fifth Republic) have been adopted or launched. However, the Yellow Vest protests from November 2018 to spring 2019 had the effect of slowing some reforms, and forced the government to postpone green taxes on oil, abolish taxes and social contributions levied on overtime hours, and increase transfers to single parents and workers with low salaries or pensions. The overall cost of these measures, due both to lower fiscal receipts and higher expenses, has been estimated at €17 billion.
The 2020 budget adopted additional changes, such as a decrease in company taxes, an elimination of the local residence taxes (taxe d’habitation) for 80% of taxpayers (with a complete elimination by 2022), a substantial cut in social-system contributions paid by employees, and a total €5 billion decrease in the income taxes paid by low-income families. The overall objectives are to increase the net incomes of low-income employees and workers, prevent capital flight and increase incentives for investors. The crucial feature is the consistency of the overall package, which favors the creation of jobs, erases some defects of the current unemployment-benefit system, and bolsters company competitiveness while slightly increasing workers’ income due to the reduction in social-system levies or contributions.
Before the outbreak of the pandemic, business investment had been boosted by Macron’s business tax cuts, favorable financing conditions and increases in labor market flexibility. Meanwhile, lower labor taxes and improved job training opportunities have helped boost job creation, although the high unemployment rate was declining rather slowly. However, the country’s structural problems – the budget deficit, the public debt, the difficulty in reforming a centralized and massive bureaucracy, and vested interests’ fierce resistance to change – were all as acute as ever. The social security budget, which was supposed to be positively balanced in 2019, went into deficit due to the Yellow Vest movement. The financial consequences of Macron’s social measures, announced on 10 December 2018 in order to calm the social unrest, had both positive and negative effects. On the one hand, growth has been sustained due to the stimulus effect of spending measures; on the other, this has compromised efforts to balance the budget and reduce the public debt, and a pension reform that was already jeopardized by strikes and protest had to be put on hold.
The pandemic radically modified the economic landscape. The government reacted swiftly to contain the negative economic consequences: First, an urgency plan (Plan d’urgence economique) was launched in March 2020, injecting €45 billion into the economy in order to avoid the collapse of companies and massive unemployment. Second, a comprehensive recovery program (France Relance) was introduced in September 2020 that involved a €100 billion investment, €40 billion of which was provided by the NextGenerationEU fund. The program targets three objectives: expediting the transition to a decarbonized economy, enhancing France’s competitiveness and ensuring social cohesion. This recovery plan was in part a short-term response to the economic slowdown, but also contained reforms and measures aimed at overcoming structural weaknesses of the French economy (notably with a substantial reduction of production taxes on companies). Third, this approach was continued in October 2021 when the government published the investment program “France 2030,” which foresees expenditure of €30 billion over the next five years on crucial manufacturing sector fields such as energy, transport and electronic components, with the goal of strengthening the industrial base and its innovation capacity.
Initial evaluations indicate that the implementation of the first two programs has been swift. Furthermore, the measures contributed to arresting the economic decline triggered by the pandemic. After a deep recession in 2020 (-9% GDP growth), the economy improved very strongly in 2021 (close to 7% GDP growth according to the latest data). By the fall of 2021, the economy had recovered to pre-crisis levels, and at the end of 2021, the unemployment rate was at its lowest level in the last 13 years. Finally, France remains the most attractive country in Europe for foreign investors. This being said, all these measures taken on the principle of “Whatever it costs” have raised the level of public debt, which was already high before the outbreak of the pandemic.
Citations:
OECD Economic Surveys: France 2021, Paris 2021
https://www.oecd.org/economy/surveys/france-2021-OECD-economic-survey-overview.pdf
EY: Baromètre de l’attractivité de la France 2021
https://www.ey.com/fr_fr/attractiveness/barometre-de-l-attractivite-de-la-france-2021
F. Corti et al.: Comparing and Assessing Recovery and Resilience Plans – Italy, Germany, Spain, France, Portugal and Slovakia, CEPS, Brussels 2021
https://www.ceps.eu/ceps-publications/comparing-and-assessing-recovery-and-resilience-plans/
The 2020 budget adopted additional changes, such as a decrease in company taxes, an elimination of the local residence taxes (taxe d’habitation) for 80% of taxpayers (with a complete elimination by 2022), a substantial cut in social-system contributions paid by employees, and a total €5 billion decrease in the income taxes paid by low-income families. The overall objectives are to increase the net incomes of low-income employees and workers, prevent capital flight and increase incentives for investors. The crucial feature is the consistency of the overall package, which favors the creation of jobs, erases some defects of the current unemployment-benefit system, and bolsters company competitiveness while slightly increasing workers’ income due to the reduction in social-system levies or contributions.
Before the outbreak of the pandemic, business investment had been boosted by Macron’s business tax cuts, favorable financing conditions and increases in labor market flexibility. Meanwhile, lower labor taxes and improved job training opportunities have helped boost job creation, although the high unemployment rate was declining rather slowly. However, the country’s structural problems – the budget deficit, the public debt, the difficulty in reforming a centralized and massive bureaucracy, and vested interests’ fierce resistance to change – were all as acute as ever. The social security budget, which was supposed to be positively balanced in 2019, went into deficit due to the Yellow Vest movement. The financial consequences of Macron’s social measures, announced on 10 December 2018 in order to calm the social unrest, had both positive and negative effects. On the one hand, growth has been sustained due to the stimulus effect of spending measures; on the other, this has compromised efforts to balance the budget and reduce the public debt, and a pension reform that was already jeopardized by strikes and protest had to be put on hold.
The pandemic radically modified the economic landscape. The government reacted swiftly to contain the negative economic consequences: First, an urgency plan (Plan d’urgence economique) was launched in March 2020, injecting €45 billion into the economy in order to avoid the collapse of companies and massive unemployment. Second, a comprehensive recovery program (France Relance) was introduced in September 2020 that involved a €100 billion investment, €40 billion of which was provided by the NextGenerationEU fund. The program targets three objectives: expediting the transition to a decarbonized economy, enhancing France’s competitiveness and ensuring social cohesion. This recovery plan was in part a short-term response to the economic slowdown, but also contained reforms and measures aimed at overcoming structural weaknesses of the French economy (notably with a substantial reduction of production taxes on companies). Third, this approach was continued in October 2021 when the government published the investment program “France 2030,” which foresees expenditure of €30 billion over the next five years on crucial manufacturing sector fields such as energy, transport and electronic components, with the goal of strengthening the industrial base and its innovation capacity.
Initial evaluations indicate that the implementation of the first two programs has been swift. Furthermore, the measures contributed to arresting the economic decline triggered by the pandemic. After a deep recession in 2020 (-9% GDP growth), the economy improved very strongly in 2021 (close to 7% GDP growth according to the latest data). By the fall of 2021, the economy had recovered to pre-crisis levels, and at the end of 2021, the unemployment rate was at its lowest level in the last 13 years. Finally, France remains the most attractive country in Europe for foreign investors. This being said, all these measures taken on the principle of “Whatever it costs” have raised the level of public debt, which was already high before the outbreak of the pandemic.
Citations:
OECD Economic Surveys: France 2021, Paris 2021
https://www.oecd.org/economy/surveys/france-2021-OECD-economic-survey-overview.pdf
EY: Baromètre de l’attractivité de la France 2021
https://www.ey.com/fr_fr/attractiveness/barometre-de-l-attractivite-de-la-france-2021
F. Corti et al.: Comparing and Assessing Recovery and Resilience Plans – Italy, Germany, Spain, France, Portugal and Slovakia, CEPS, Brussels 2021
https://www.ceps.eu/ceps-publications/comparing-and-assessing-recovery-and-resilience-plans/
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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7
6
7
6
Labor market policies have been more or less successful.
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3
4
3
Strategies against unemployment have shown little or no significant success.
2
1
1
Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Over the last decade, France has struggled with a high level of unemployment, reaching 9.9% in the first quarter of 2016. Since then, the unemployment rate has been decreasing slowly, but some specific concerns remain. In spite of slight progress since 2020, the overall employment rate remains low, beneath the OECD average, a problem especially significant for workers over 55 years of age (one of the lowest such employment rates within the OECD). Moreover, the rate of youth unemployment (among people 15-24 years old) is still high, a problem related to the complex and unsatisfactory school-to-work transition mechanism. Although all governments put in place special labor market policies to meet these challenges and support young people, a report released in 2017 by the National Accounting Office showed that these measures were costly (€10.5 billion annually), inefficient (most young people did not find a job at the end of their publicly funded training program) and incoherent (there were too many unattractive and poorly managed programs). Most young people were hired on short-time contracts, with two-thirds of the contracts holding a duration of less than one month.
From the very beginning in 2017, the Macron government adopted a different strategy, deciding to eliminate measures having purely cosmetic effects (such as subsidized jobs for young people), and instead placing a special focus on training and employability. In parallel, measures have been taken to make unemployment benefits less attractive, or to better control efforts to game the system by both employers and employees. Paradoxically, there are numerous unfilled job vacancies across various sectors of the economy. More and more unskilled jobs, particularly in the construction and agricultural sectors, are being filled by non-EU migrants or workers from Eastern and Central Europe recruited on temporary contracts. By the end of 2019, the first positive effects started to be felt, and the unemployment rate had fallen from 9.5% (2017) to 8.1% (fourth quarter of 2019).
The pandemic crisis had paradoxical effects, since the massive support granted to companies avoided a labor market collapse even though the unemployment rate rose again, approaching 2017 levels (from 8.1% to 9.1% in the fourth quarter of 2020). Thanks to the massive economic emergency and recovery measures, especially the enhancement of the job retention scheme, economic activity rebounded, and the unemployment rate fell again to the level of the pre-pandemic period (8.1%). The overall employment rate is at the highest level since 1975 (67.5% of the active population; 70.3% among men and 64.8% among women), and the number of unfilled jobs has hit a near-record high. However, the black spots mentioned above remain, including the low rate of employment among older workers and the very high rate of youth unemployment. The proportion of young persons between 15 and 24 years who are neither in employment nor in education or training (NEET), which peaked at 28% in 2012, still remained at 19.9% for women and 18.1% for men in 2020, above the OECD average (17.2%/14.3%). Beginning in February 2022, the Macron government has decided to create from 500,000 grants for young people searching a job, conditioned on their attendance at training programs (Youth Guarantee scheme). If the pandemic does not disrupt economic forecasts too much, the unemployment rate is projected to continue falling.
Concerning the labor-law code and the labor market, several reforms were realized during Macron’s first term. In his presidential campaign in 2017, Macron
announced his intention to substantially reform the labor-law code by using ordinances (drafted and adopted by the executive alone). The ordinances which followed in the same year were characterized by multiple adjustments rather than the adoption of a brand-new grand design. They introduced more flexibility, simplified rules, merged diverse internal bodies involving social partners at the company level, and gave greater space to regulations at the company level compared to the sectoral level in order to allow more flexibility especially for small- and medium-sized companies. These highly controversial measures, fiercely opposed by some trade unions, have produced positive effects by lowering the number of legal cases related to the firing of employees (the law has fixed standard rates of financial compensation). The government has also launched immediate measures to improve the job qualifications of long-term unemployed and young people who left school without a diploma, a program involving €15 billion over five years. Furthermore, a reform of the job training system was adopted in 2018, which has upgraded apprenticeship schemes (with the number of contracts increasing from 275,000 in 2016 to 675,000 in 2020).
During the summer of 2018, negotiations began on a reform of the unemployment insurance scheme, with plans to adopt the reform in 2019. In May 2019, however, the government rejected the solutions negotiated between trade unions and business organizations. Instead, it introduced a set of more sweeping measures aimed at restricting unemployment benefits and reducing the program’s huge deficit. A system of bonuses and penalties has also been introduced with the aim of reducing the number of very short-term contracts (which allows employers and employees to exploit insurance-system loopholes). Unions objected to the implementation of the new scheme, and it was temporarily suspended during the pandemic. But the case brought by the unions to the administrative court was rejected, and the government decided to go ahead with implementation beginning on 1 October 2022.
Citations:
OECD: Youth not in employment, education or training (NEET)
https://data.oecd.org/youthinac/youth-not-in-employment-education-or-training-neet.htm
From the very beginning in 2017, the Macron government adopted a different strategy, deciding to eliminate measures having purely cosmetic effects (such as subsidized jobs for young people), and instead placing a special focus on training and employability. In parallel, measures have been taken to make unemployment benefits less attractive, or to better control efforts to game the system by both employers and employees. Paradoxically, there are numerous unfilled job vacancies across various sectors of the economy. More and more unskilled jobs, particularly in the construction and agricultural sectors, are being filled by non-EU migrants or workers from Eastern and Central Europe recruited on temporary contracts. By the end of 2019, the first positive effects started to be felt, and the unemployment rate had fallen from 9.5% (2017) to 8.1% (fourth quarter of 2019).
The pandemic crisis had paradoxical effects, since the massive support granted to companies avoided a labor market collapse even though the unemployment rate rose again, approaching 2017 levels (from 8.1% to 9.1% in the fourth quarter of 2020). Thanks to the massive economic emergency and recovery measures, especially the enhancement of the job retention scheme, economic activity rebounded, and the unemployment rate fell again to the level of the pre-pandemic period (8.1%). The overall employment rate is at the highest level since 1975 (67.5% of the active population; 70.3% among men and 64.8% among women), and the number of unfilled jobs has hit a near-record high. However, the black spots mentioned above remain, including the low rate of employment among older workers and the very high rate of youth unemployment. The proportion of young persons between 15 and 24 years who are neither in employment nor in education or training (NEET), which peaked at 28% in 2012, still remained at 19.9% for women and 18.1% for men in 2020, above the OECD average (17.2%/14.3%). Beginning in February 2022, the Macron government has decided to create from 500,000 grants for young people searching a job, conditioned on their attendance at training programs (Youth Guarantee scheme). If the pandemic does not disrupt economic forecasts too much, the unemployment rate is projected to continue falling.
Concerning the labor-law code and the labor market, several reforms were realized during Macron’s first term. In his presidential campaign in 2017, Macron
announced his intention to substantially reform the labor-law code by using ordinances (drafted and adopted by the executive alone). The ordinances which followed in the same year were characterized by multiple adjustments rather than the adoption of a brand-new grand design. They introduced more flexibility, simplified rules, merged diverse internal bodies involving social partners at the company level, and gave greater space to regulations at the company level compared to the sectoral level in order to allow more flexibility especially for small- and medium-sized companies. These highly controversial measures, fiercely opposed by some trade unions, have produced positive effects by lowering the number of legal cases related to the firing of employees (the law has fixed standard rates of financial compensation). The government has also launched immediate measures to improve the job qualifications of long-term unemployed and young people who left school without a diploma, a program involving €15 billion over five years. Furthermore, a reform of the job training system was adopted in 2018, which has upgraded apprenticeship schemes (with the number of contracts increasing from 275,000 in 2016 to 675,000 in 2020).
During the summer of 2018, negotiations began on a reform of the unemployment insurance scheme, with plans to adopt the reform in 2019. In May 2019, however, the government rejected the solutions negotiated between trade unions and business organizations. Instead, it introduced a set of more sweeping measures aimed at restricting unemployment benefits and reducing the program’s huge deficit. A system of bonuses and penalties has also been introduced with the aim of reducing the number of very short-term contracts (which allows employers and employees to exploit insurance-system loopholes). Unions objected to the implementation of the new scheme, and it was temporarily suspended during the pandemic. But the case brought by the unions to the administrative court was rejected, and the government decided to go ahead with implementation beginning on 1 October 2022.
Citations:
OECD: Youth not in employment, education or training (NEET)
https://data.oecd.org/youthinac/youth-not-in-employment-education-or-training-neet.htm
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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9
9
Taxation policy fully achieves the objectives.
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6
7
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Taxation policy largely achieves the objectives.
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3
4
3
Taxation policy partially achieves the objectives.
2
1
1
Taxation policy does not achieve the objectives at all.
Taxes and social contributions are in sum higher in France than anywhere else in the OECD except for Denmark (45.4% of GDP in 2020). This is a consequence of extraordinarily generous political and budgetary commitments that have led to a continuous rise in taxes. Nonetheless, tax revenues do not cover expenses, as public spending is exceptionally high by Western standards. The Macron administration has started to reverse the trend, but the process has been rather slow. Public expenditure, after having slightly dropped since 2017, rose sharply from 55.4% (2019) to 61.8% of GDP in 2020 as a result of the pandemic crisis. Taxes have not been increased, but expenditures have grown massively, contributing to an increase in the budget deficit (9.1% in 2020, 8.0% in 2021) and the state debt (114.9% of GDP by mid-2021).
Whereas the lowering or elimination of many charges and taxes has improved companies’ competitiveness, the overall tax ratio has remained at a high level similar to that of previous years. Furthermore, the tax burden is viewed as penalizing the lower-middle working classes, which led to the Yellow Vest movement in November 2018.
The tax policy initiated by Macron has sought to exert better control of the main drivers of public spending. One tactic, for example, was to sign “contracts” with key local government authorities aiming to slow the expansion of local expenses. The suppression of the housing tax paid by tenants or owners, another promise of the Macron program in 2017, will take full effect by 2022. This overall policy attracted fierce criticism from opposition parties and the media, and Macron was depicted as favoring the wealthy at the expense of the poor. The low flat tax rate for income on capital and the partial abolition of the wealth tax in particular were perceived as symbolic of Macron’s role as a “president of the rich.” In fact, the criticism proved off base, as the new taxation system will increase public revenue due to a better evaluation of taxable wealth. However, in order to calm the social revolt, Macron’s government was forced to substantially revise its tax policy, reducing taxes and social-system contributions for lower income groups. As a response to the pandemic crisis, the Recovery Plan launched in 2020 contained a substantial lowering of the production taxes charged to companies.
The ecological sustainability of taxation also has to be rethought, since the tax increases on fossil-fuel-based energy served as the trigger of the uprising in November 2018. These taxes have been put on hold, and flat-rate subsidies were granted to low-income families at the end of 2021 in order to alleviate the burden of rising energy costs.
Citations:
OECD: Revenue Statistics 2021. The Initial Impact of COVID-19 on OECD Tax Revenues, Paris, December 6, 2021
https://www.oecd.org/tax/revenue-statistics-2522770x.htm
Whereas the lowering or elimination of many charges and taxes has improved companies’ competitiveness, the overall tax ratio has remained at a high level similar to that of previous years. Furthermore, the tax burden is viewed as penalizing the lower-middle working classes, which led to the Yellow Vest movement in November 2018.
The tax policy initiated by Macron has sought to exert better control of the main drivers of public spending. One tactic, for example, was to sign “contracts” with key local government authorities aiming to slow the expansion of local expenses. The suppression of the housing tax paid by tenants or owners, another promise of the Macron program in 2017, will take full effect by 2022. This overall policy attracted fierce criticism from opposition parties and the media, and Macron was depicted as favoring the wealthy at the expense of the poor. The low flat tax rate for income on capital and the partial abolition of the wealth tax in particular were perceived as symbolic of Macron’s role as a “president of the rich.” In fact, the criticism proved off base, as the new taxation system will increase public revenue due to a better evaluation of taxable wealth. However, in order to calm the social revolt, Macron’s government was forced to substantially revise its tax policy, reducing taxes and social-system contributions for lower income groups. As a response to the pandemic crisis, the Recovery Plan launched in 2020 contained a substantial lowering of the production taxes charged to companies.
The ecological sustainability of taxation also has to be rethought, since the tax increases on fossil-fuel-based energy served as the trigger of the uprising in November 2018. These taxes have been put on hold, and flat-rate subsidies were granted to low-income families at the end of 2021 in order to alleviate the burden of rising energy costs.
Citations:
OECD: Revenue Statistics 2021. The Initial Impact of COVID-19 on OECD Tax Revenues, Paris, December 6, 2021
https://www.oecd.org/tax/revenue-statistics-2522770x.htm
Graph View
To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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7
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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1
Budgetary policy is fiscally unsustainable.
France’s budgetary situation is still unsatisfactory with regard to European obligations and long-term sustainability. Over recent years, the commitment to reduce public spending (cuts in the number of public servants, in security and military expenses, and in social benefits) was not fulfilled due to the outbreak of the pandemic. Faced with the necessity to compensate for the collapse of economic activities, the government had to inject massive resources in the private and public sectors, pushing the budget deficit to 9.1% in 2020 (8.0% in 2021) and forcing the government to borrow massively.
The president’s aim, which was to return to a position of sound public finances and regain financial maneuvering room, but also to recover lost credibility in Europe, has not been realized. If the new scenario created by the pandemic has paradoxically provided some breathing space given the new conditions that all European countries are facing, the ability to land on more stable ground might be difficult in the forthcoming years, not only in budgetary terms, but also from a social and political point of view. It will be difficult to increase taxes while the expectations of the citizenry, far from diminishing, are actually increasing.
The huge deficits in the 2020 and 2021 budgets were permitted by the “whatever it costs” strategy launched to fight the pandemic’s dramatic economic consequences, and were facilitated by the accommodating policy of the European Central Bank (ECB) and by the very low rates of interest. Furthermore, the financial facilities created by the NextGenerationEU fund should be mentioned, as they helped to finance €40 billion of the total €100 billion envisioned in the France Relance recovery plan. This easygoing policy might face tough challenges in the near future if interest rates increase again, rendering the debt unsustainable. Much will depend on the EU framework in the coming years, for instance with regard to the revision of the stability pact, the establishment of EU-level taxes (carbon tax) or the funding by the EU of some national expenditures, for instance in the field of energy, climate change or security. France strongly advocates this kind of measures and is counting on its EU presidency to push them forward.
The president’s aim, which was to return to a position of sound public finances and regain financial maneuvering room, but also to recover lost credibility in Europe, has not been realized. If the new scenario created by the pandemic has paradoxically provided some breathing space given the new conditions that all European countries are facing, the ability to land on more stable ground might be difficult in the forthcoming years, not only in budgetary terms, but also from a social and political point of view. It will be difficult to increase taxes while the expectations of the citizenry, far from diminishing, are actually increasing.
The huge deficits in the 2020 and 2021 budgets were permitted by the “whatever it costs” strategy launched to fight the pandemic’s dramatic economic consequences, and were facilitated by the accommodating policy of the European Central Bank (ECB) and by the very low rates of interest. Furthermore, the financial facilities created by the NextGenerationEU fund should be mentioned, as they helped to finance €40 billion of the total €100 billion envisioned in the France Relance recovery plan. This easygoing policy might face tough challenges in the near future if interest rates increase again, rendering the debt unsustainable. Much will depend on the EU framework in the coming years, for instance with regard to the revision of the stability pact, the establishment of EU-level taxes (carbon tax) or the funding by the EU of some national expenditures, for instance in the field of energy, climate change or security. France strongly advocates this kind of measures and is counting on its EU presidency to push them forward.
Graph View
To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
Having improved since 2007, France performs well in research and development policy. According to the EU Innovation Scoreboard 2021, France was ranked 14th out of 38 European states with respect to innovation capacity. In the report’s global innovation index, France performs slightly above the EU average and is ranked in the group of “strong innovators,” behind the group of “innovation leaders.” Although the absolute level of innovation performance remains strong, the French position relative to the EU has slightly declined in the last years. Overall spending on research and development constitutes 2.2% of GDP (2019), which means a marginal increase compared to 2000 and a slight decline since 2015. R&I spending is still below the OECD average, and far from the EU target of 3%. Whereas public spending is comparable to the best-performing countries, private spending remains less strong. France’s main relative weaknesses are its low levels of private investment and the transfer of innovation into the industrial sector. A new law (Loi PACTE) was passed in May 2019 with the aim of supporting innovation and improving company performance, particularly for small and medium size enterprises.
On the positive side, the measures initiated by the Hollande administration have encouraged the creation of new technology-based startup firms. President Macron declared that he would “make France a startup nation,” and his government has adopted further legal and fiscal policy measures intended to facilitate the creation and growth of startups. For example, he created a €5 billion development fund earmarked for startups that had passed through initial stages of growth. The government’s objective is to boost the capitalization of these new companies, thus avoiding the twin risks of expatriation or absorption by more powerful foreign companies. The government has also resisted the suggestion of reducing the tax exemption offered to companies that improve their research capacities in spite of its increasingly high costs to the state budget. The recovery programs aimed at overcoming the pandemic crisis contain important measures favorable to startups and to innovation in general. Presently, France has become Europe’s second-largest tech market by dollar funding, outpacing Germany and falling just behind the United Kingdom. Over the past year, steady progress has been made, and France has moved up to the 11th position (out of 51 high-income economies) in 2020 from 16th (2019) in the rankings of the World Intellectual Property Organization (WIPO) Global Innovation Index.
However, barriers to innovation still exist. Cooperation between academic institutions and businesses is still restricted by cultural traditions, such as a lack of investment by small and medium-sized companies and the reluctance of researchers to invest in policy-relevant or applied research. Productivity levels and public research could also be improved. However, the development of public-private initiatives as well as the launching of incubators by private investors are improving the quantity and quality of initiatives and investments, in particular in new technologies.
Citations:
European Innovation Scoreboard 2021
https://ec.europa.eu/info/research-and-innovation/statistics/performance-indicators/european-innovation-scoreboard_en
World Intellectual Property Organization (WIPO): Global Innovation Index 2021
https://www.wipo.int/global_innovation_index/en/2021/
On the positive side, the measures initiated by the Hollande administration have encouraged the creation of new technology-based startup firms. President Macron declared that he would “make France a startup nation,” and his government has adopted further legal and fiscal policy measures intended to facilitate the creation and growth of startups. For example, he created a €5 billion development fund earmarked for startups that had passed through initial stages of growth. The government’s objective is to boost the capitalization of these new companies, thus avoiding the twin risks of expatriation or absorption by more powerful foreign companies. The government has also resisted the suggestion of reducing the tax exemption offered to companies that improve their research capacities in spite of its increasingly high costs to the state budget. The recovery programs aimed at overcoming the pandemic crisis contain important measures favorable to startups and to innovation in general. Presently, France has become Europe’s second-largest tech market by dollar funding, outpacing Germany and falling just behind the United Kingdom. Over the past year, steady progress has been made, and France has moved up to the 11th position (out of 51 high-income economies) in 2020 from 16th (2019) in the rankings of the World Intellectual Property Organization (WIPO) Global Innovation Index.
However, barriers to innovation still exist. Cooperation between academic institutions and businesses is still restricted by cultural traditions, such as a lack of investment by small and medium-sized companies and the reluctance of researchers to invest in policy-relevant or applied research. Productivity levels and public research could also be improved. However, the development of public-private initiatives as well as the launching of incubators by private investors are improving the quantity and quality of initiatives and investments, in particular in new technologies.
Citations:
European Innovation Scoreboard 2021
https://ec.europa.eu/info/research-and-innovation/statistics/performance-indicators/european-innovation-scoreboard_en
World Intellectual Property Organization (WIPO): Global Innovation Index 2021
https://www.wipo.int/global_innovation_index/en/2021/
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
10
9
9
The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
8
7
6
7
6
The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
5
4
3
4
3
The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
2
1
1
The government does not contribute to improving the regulation and supervision of financial markets.
French governments of either political complexion have generally been in favor of regulation and control of the global financial system. They have been active internationally and at the EU level in supporting better international banking regulations. They have been strongly supportive of all initiatives contributing to the re-capitalization of banks, to the better control of speculative funds and to the fight against fiscal evasion and tax havens. They also have been active, together with 10 other EU member governments, in proposing to impose a levy on financial transactions (the so-called Tobin tax). Furthermore, they have pushed for the creation of a banking supervision mechanism at the EU level. The Hollande and Macron governments have been or are committed to improving fiscal cooperation on information exchange, the fight against tax havens and tax evasion. In 2016, the French parliament adopted a better system of controls and penalization to tackle corruption at the international level (“Loi Sapin 2”), and Macron has actively pushed at the EU level for higher and fairer taxation of multinational companies working in the information technology sector (the so-called GAFA tax, named after Google, Apple, Facebook and Amazon). Following the failure of this initiative, the French parliament adopted its own levy applicable to the large companies, which in turn triggered a fierce response from the Trump administration. During the Biarritz G-7 summit, France said it would abolish this tax once an agreement had been reached at the OECD level. This should happen now that the tax has been supported by the G-20. Macron has decided to push further for the creation and implementation of a carbon tax at the EU level, and has announced that this will be a top priority of the country’s presidency during the first semester of 2022.