In­creased con­sumer spend­ing is the key to France’s eco­nomic re­cov­ery

‘Public money is not un­lim­ited. The “what­ever it takes” must pro­gres­sively give way to the “when it is needed”’ Europe’s road to re­cov­ery

The Daily Telegraph - Business - - Business - By Henry Sa­muel in Paris

This five-part se­ries looks at how ma­jor Euro­pean economies have coped with the Covid cri­sis and the ways in which gov­ern­ments have scram­bled to save jobs and busi­nesses. In part one, we go to France, where Pres­i­dent Em­manuel Macron vowed to save the econ­omy “what­ever the cost”, but is now try­ing to wean busi­nesses off state sup­port.

Is­abelle Le­gros is used to the sum­mer bus­tle of tourists at her ho­tel off the Champs-Elysées in the world’s most vis­ited cap­i­tal. This year, how­ever, an eerie si­lence reigns at the Plaza Elysées as the usual mix of Amer­i­can and Asian vis­i­tors stay at home due to on­go­ing coro­n­avirus fears and travel re­stric­tions.

“Nor­mally, the place is full of fam­i­lies and chil­dren. But there’s no­body in the cor­ri­dors; you can hear a pin drop,” she says.

Oc­cu­pancy was down in July from an av­er­age 88pc to just 13pc. Three­quar­ters of staff are fur­loughed. The plight of the Plaza Elysées is sadly typ­i­cal. Over­all oc­cu­pancy rates in Paris ho­tels were just 18pc in June and 30pc dur­ing the first two weeks of July. Tourism and hospi­tal­ity are merely the tip of the ice­berg that is France’s eco­nomic prob­lems. Af­ter en­dur­ing one of the world’s most dra­co­nian Covid lock­downs from March 17 to May 11 and more than 30,000 deaths, the Eu­ro­zone’s sec­ond-big­gest econ­omy is ex­pected to con­tract by 11pc this year – the big­gest drop since the Sec­ond World War.

While it slumped a record 13.8pc in the sec­ond quar­ter, worse than Ger­many, which fell 10.1pc, the con­trac­tion was not as se­vere as the 17pc pre­dicted by na­tional statis­tics of­fice INSEE. Nor was it nearly as bad as Spain, on 18.5pc, and the UK, the G7 out­lier on 20.4pc. Still, up to a mil­lion jobs could be lost by early 2021, rais­ing un­em­ploy­ment to as high as 12.5pc. The public debt-to-GDP ra­tio is due to soar to 120.9pc in 2020 from just un­der 99pc in 2019, ac­cord­ing to INSEE.

Pres­i­dent Em­manuel Macron pledged to pro­tect the econ­omy from the coro­n­avirus epi­demic “what­ever the cost”. His gov­ern­ment has since com­mit­ted more than €460bn (£414bn) in public funds, mostly in the form of state-guar­an­teed loans and tax breaks to help com­pa­nies cope with a slump in business. Many were al­ready in bad shape be­fore the vi­ral out­break with a debt-to-GDP ra­tio of 74pc – well above the eu­ro­zone av­er­age of 60pc.

The state has pro­vided €8bn in sub­si­dies for small com­pa­nies with a rev­enue of less than €1m and who have lost 50pc or more of their rev­enue in the past four months com­pared to the pre­vi­ous year, via a “sol­i­dar­ity fund”. It has pumped €8bn into the au­to­mo­tive sec­tor and €15bn into the trans­port and aero­nau­ti­cal in­dus­try, in­clud­ing €7bn for Air France, the stricken na­tional car­rier. The tourism sec­tor has been ear­marked to re­ceive €18bn.

France launched one of the most gen­er­ous fur­lough schemes in Europe, ini­tially pay­ing work­ers 70pc of their gross salary – roughly equiv­a­lent to 84pc of net salary – or 100pc of net salary for those on the min­i­mum wage. At one point around half the work­force were ben­e­fi­cia­ries of the cri­sis scheme.

Wor­ried they may adopt the new sit­u­a­tion as a per­ma­nent so­cial right, Macron urged the French to get back to work as soon as pos­si­ble when lock­down was lifted. One boss re­marked he had had enough of “Zoom meet­ings from the bar­be­cue”.

Bank of France chief Fran­cois Villeroy de Gal­hau warned: “Public money is not un­lim­ited. The ‘what­ever it takes’ must pro­gres­sively give way to the ‘when it is needed’.”

How­ever, amid fears of a sec­ond wave, Elis­a­beth Borne, the French labour min­is­ter, has ad­vised those who can, to con­tinue home work­ing. The gov­ern­ment has pledged to main­tain fur­lough­ing schemes in worst-hit sec­tors like ho­tels and restau­rants for up to two years.

Mean­while fi­nance min­is­ter Bruno Le Maire is draft­ing a re­cov­ery plan worth more than €100bn to be pre­sented this week. Some €40bn of that is due to come from Euro­pean sub­si­dies af­ter a Brus­sels sum­mit Macron trum­peted as “his­toric”. The money will go to cre­at­ing jobs for young peo­ple fac­ing the worst em­ploy­ment prospects in years, reducing French car­bon emis­sions, and pro­tect­ing its myr­iad small busi­nesses from col­lapse. An­other €40bn will go to over­haul­ing strate­gic man­u­fac­tur­ing sites. While France hopes to re­turn to pre-cri­sis lev­els within two years, much de­pends on con­sumer spend­ing, the tra­di­tional en­gine of the Gal­lic econ­omy.

In­stead of splash­ing out, the French could be sit­ting on a €100bn pool of per­sonal sav­ings by the end of the year, the gov­er­nor of the Bank of France has es­ti­mated.

Un­til now the gov­ern­ment has been con­tent to push sup­ply-side mea­sures, no­tably a cut in “pro­duc­tion taxes”, le­vies paid on top of the nor­mal cor­po­rate in­come tax worth a com­bined €77bn – twice the EU av­er­age and seven times more than in Ger­many.

“It has seen no need to stim­u­late de­mand via a VAT cut or to in­ter­vene in real es­tate with a stamp duty hol­i­day as in the UK be­cause it con­sid­ers fi­nan­cial con­di­tions are easy enough,” says Ana Boata, head of macroe­co­nomic re­search at Euler Her­mes.

The gov­ern­ment had hoped con­sumer spend­ing would rally on pledges not to raise taxes un­til the end of Pres­i­dent’s five-year term in 2022. Fresh do­mes­tic stim­u­lus may be vi­tal to avoid free fall as the French re­turn from sum­mer breaks.

For OFCE econ­o­mist Mathieu Plane, the ball is now firmly in the con­sumers’ court. “There have never been so many sav­ings and house­holds have never been so rich. The real re­cov­ery plan is in the hands of French house­holds.”

Cafés in Paris have been hit by a big drop in the flow of tourists visit­ing the French cap­i­tal

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