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Pont Neuf Paris

Crise? Quelle crise?

04 November 2014

France is viewed by many as a nation in crisis. European fund manager Stuart Mitchell disagrees and explains why he is optimistic for the Fifth Republic.

In the 30 years I have spent visiting companies in France, I have never known the country not to consider itself ‘in crisis’. While in Britain a crisis is something that comes to a head and then is, for better or worse, resolved, in France the condition seems permanent. Sometimes the crisis is characterised by tedium, as now under the less-than-colourful François Hollande. Sometimes it is more exciting, dangerous almost. Think of Jacques Chirac’s attempt to control pension costs, abandoned in the face of acute civil disobedience; or the student riots of the 1980s; Or Nicolas Sarkozy’s intemperate response, hysterical even, to outbreaks of rioting in the big city suburbs or banlieues.

A recurring feature of the crise has been a self-proclaimed struggle to protect what is seen as the French way of life in the face of rampant mondialisation (which is a distinctly French version of the Anglo-Saxon notion of globalisation). Vested interests on all sides, when threatened by change, raise the cry that sacred acquis sociaux (social rights, benefits or gains) are under attack. The streets fill; the government retreats.

Time bomb?

The consensus view outside the country is different, but scarcely more optimistic. This holds that France is an out-of-control public sector machine, a ‘rabbit caught in the headlights’, paralysed by the burden of the growing and unsustainable weight of public debt. Doomsters proclaim that France is ungovernable, and that the Fifth Republic’s most unpopular president is unable to take on those vested interests so desperately clinging to their special privileges. Just look, for example, at the ruinous strike by Air France pilots in the last few weeks, costing the company €350 million. Even the normally restrained Economist has talked of France as the “time bomb at the centre of Europe”.

Both views are, in my view, wrong.

Far from being in a catastrophic state, the French economy offers plenty of evidence to suggest that things are in better shape than many observers think. Consider a few comparisons with Britain. While the British economy shrank by over 6% after the 2007 peak, the French economy suffered a much more modest contraction at just under 4%. The British economy, even if now at last growing decently, has only just recovered to surpass this earlier level; France’s economy has for some time now been ahead of its earlier peak. France runs a lower public deficit than the UK; George Osborne can only look with envy at his cross-Channel neighbour’s current account deficit, less than one third the size of that in Britain. Gallic gloom notwithstanding, the two countries, almost identical in population, have economies of almost identical size.

Further, there has – despite all the rhetoric – been some real progress. Slow as M. Hollande was to appreciate the magnitude of the problems facing the eurozone, his recently announced ‘Responsibility Pact’ is a step in the right direction. Citing the “Scandinavian model” he proposes cutting spending, and reducing both taxes and red tape. The proposed €30 billion cut in corporate social contributions should reduce companies’ wage costs by over 5%, in return for which employers will be under pressure to create jobs and maintain social dialogue. This proposal has been accompanied by the appointment of the young and dynamic Manuel Valls as Prime Minister, a self-styled ‘Blairiste’ from the right of the Socialist Party. He is supported by 36-year-old former investment banker Emmanuel Macron who, as the economy minister, has talked of “lifting all blockages” and “changing mentalities”. Macron has just unveiled a batch of reforms. These include loosening restrictions on Sunday trading, opening bus transportation to competition and “liberalising” the health sector and legal system. Germany has long demanded greater efforts to bring France’s budget deficit under control – this is a significant first step; significant enough that at a recent meeting of French and German finance ministers it appears that Germany, in exchange, has agreed to raise future levels of investment in France by some €50 billion.

Rude health

Finally, the French corporate sector is in as rude health as I can remember in three decades. Far from being victims of mondialisation, the French lead it. Take the luxury goods industry. The French virtually invented it, and now boast the sector’s largest and most powerful companies, such as Louis Vuitton and Hermès. Or take the aerospace industry. Airbus is one of the greatest companies in the world, employing some 135,000 workers and generating €23 billion of exports per annum. Finally, France has vast expertise in the car industry and pharmaceuticals, with world leaders such as Peugeot and Sanofi.

Oublions la crise…?

Stuart Mitchell of S. W. Mitchell Capital is the manager of the St. James’s Place Continental European fund and co-manager of the St. James’s Place Greater European fund.

The information contained above, does not constitute investment advice.  It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate risks, consequences and suitability of any prospective fund or investment. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James's Place.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

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