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
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