Yellow-vest re­volt re­flects deep malaise of France

Tax rise that sparked yellow-vest protests against Em­manuel Macron was the straw that broke the camel’s back, writes Matthew Lynn

The Sunday Telegraph - Money & Business - - Front page -

Three weeks ago, on Nov 15, a rag­tag army of pro­test­ers dressed in the yellow hi-vis­i­bil­ity jack­ets that are com­pul­sory for French mo­torists were pre­par­ing to travel to Paris for a day of protests that, while may have started peace­fully, soon turned vi­o­lent and ugly. By the end of the week­end, more than 100 demon­stra­tors and po­lice had been in­jured and many of the cap­i­tal’s grand­est boule­vards had been turned into a war zone. But some­thing else hap­pened on that day as well. The French state ran out of money.

Nov 15, ac­cord­ing to cal­cu­la­tions by the In­sti­tut Moli­nari, a rare French free-mar­ket think tank, was the day all money the gov­ern­ment raises in taxes had been spent, and it would have to start bor­row­ing to cover its lav­ish spend­ing for the rest of the year.

It is the ear­li­est date of any of the ma­jor Euro­pean coun­tries, and it is pro­jected to get worse and worse over the next few years. A co­in­ci­dence? Not ex­actly. In fact, the re­bel­lion against Em­manuel Macron, the pres­i­dent, is the in­evitable re­sult of a failed eco­nomic model. For decades, the state has funded an op­u­lent wel­fare state with in­creas­ingly pun­ish­ing lev­els of tax­a­tion. But time is run­ning out, and Macron’s at­tempts at re­form have so far been laugh­ably in­ad­e­quate. With his meek sur­ren­der to the pro­test­ers, it is im­pos­si­ble to see him turn­ing around his pres­i­dency now – and the French cri­sis will get worse be­fore it gets bet­ter.

The trig­ger for the gilets jaunes move­ment was a planned rise in diesel fuel duty set for Jan­uary. If we didn’t al­ready have the phrase “the straw that broke the camel’s back”, some­one would have to coin it to cover the fu­ri­ous re­ac­tion of the French to a fairly mod­est rise in the cost of fill­ing up their Re­nault. A few cents here or there on a litre of diesel is hardly the big­gest deal in the world.

Bri­tish mo­torists are used to be­ing fleeced by the Chan­cel­lor ev­ery year and don’t do any­thing more than grum­ble. But to un­der­stand the fury it stirred, you have to look be­yond Paris to the France of stag­nant wages, stalled growth, mass un­em­ploy­ment and high prices where peo­ple are strug­gling to make ends meet.

France was a bril­liantly suc­cess­ful econ­omy over the im­me­di­ate post-war pe­riod. Dur­ing the “30 glo­ri­ous years”, as the pe­riod that ran from 1945-75 is known among the coun­try’s economists, its po­si­tion at the cross­roads of Europe, its suc­cess in the man­u­fac­tur­ing in­dus­try, and the boost to growth that came from steadily re­mov­ing tar­iffs as the Com­mon Mar­ket, as the Euro­pean Union was orig­i­nally known, was built, were spec­tac­u­lar.

The econ­omy grew at an av­er­age rate of close on 4pc a year, far faster than at any com­pa­ra­ble pe­riod in its his­tory, and mak­ing it richer than tra­di­tional ri­vals such as Bri­tain. Not only did the econ­omy grow, so did wages. From 1945-80, av­er­age adult in­come rose by 3.7pc a year. The French grew steadily wealth­ier as the econ­omy ex­panded, and man­aged the en­vi­able com­bi­na­tion of higher wages, shorter work­ing weeks and more and more gen­er­ous ben­e­fits. Times were good, and most peo­ple ex­pected that to con­tinue.

But from the Eight­ies on­wards it all started to change. Global growth sud­denly be­came far more chal­leng­ing, and, at the same time, the so­cial­ist gov­ern­ment led by

François Mit­ter­rand em­barked on a dis­as­trous ex­per­i­ment in state so­cial­ism that un­der­mined con­fi­dence in the econ­omy. The num­bers started to slide. From 1980 to 2014, the av­er­age an­nual wage growth dropped to a rel­a­tively mea­gre 0.9pc a year, and over­all eco­nomic ex­pan­sion was not much bet­ter. While other ma­jor Euro­pean economies such as Bri­tain and Ger­many re­formed and lib­er­alised to meet the chal­lenges of a new era, France stuck rigidly with a model de­signed for a dif­fer­ent world.

In­deed poli­cies such as the 35-hour week dou­bled down on the old model. High taxes and lav­ish ben­e­fits worked for an econ­omy with full em­ploy­ment and 4pc an­nual growth. With 1pc growth, and 10pc un­em­ploy­ment, they turned into a de­bil­i­tat­ing bur­den.

A few num­bers help ex­plain the prob­lem. The me­dian take-home salary in France is just €1,700 (£1,500) a month, very lit­tle to sup­port a fam­ily in a coun­try where prices are high (and that of course is a me­dian, so half the peo­ple are try­ing to make ends meet on less than that).

In­equal­ity has steadily widened, with the top 20pc of the pop­u­la­tion earn­ing more than five times the amount of the bot­tom 20pc. Ever since the fi­nan­cial crash, growth has stag­nated, and even with mod­est up­turn this year strug­gled to reach 1.8pc. Un­em­ploy­ment has re­mained stub­bornly high at more than 9pc of the work­force. France’s so­cial se­cu­rity sys­tem might be gen­er­ous, but it is also crush­ingly ex­pen­sive, at a total cost of more than €700bn a year, which must be fi­nanced by some of the high­est taxes in the world. France prides it­self on be­ing an egal­i­tar­ian coun­try, but that has be­come less true.

Ac­cord­ing to the econ­o­mist Thomas Piketty, whose, book on global trends in cap­i­tal was a world­wide best­seller, France has been get­ting steadily less equal, and de­spite the vast size of its state only looks roughly fair when com­pared to the United States. From 1983 to 2007, for ex­am­ple, the share of na­tional in­come go­ing to the top 1pc of earn­ers rose from 8pc to 12pc, and it has gone up even more since then.

Only the US has seen such a widen­ing gulf be­tween the rich and poor. Taxes have be­come un­af­ford­able for many peo­ple. In France, you have to work until July 27 ev­ery year sim­ply to pay all taxes and be­fore you earn any money for your­self. That is the lat­est date in the EU.

As other coun­tries cut taxes and France doesn’t, that gap has been widen­ing. The fig­ures are star­tling. In or­der to have €100 of ac­tual spend­ing money, a French worker has to first pay €133 in taxes and so­cial charges. The av­er­age for the EU is €84, and in the UK is only €54. French wages might look higher than Swedish or Dan­ish ones, for ex­am­ple. But once taxes are taken into ac­count, the av­er­age French worker has 21pc less pur­chas­ing power than a Swede and 33pc less than a Dane. Taxes are now at such a level that they are not sim­ply squeez­ing in­comes but cre­at­ing real poverty and de­pri­va­tion.

The rise in fuel taxes needs to be seen in that con­text. In a coun­try with av­er­age lev­els of taxes, and ris­ing wages, they would be a mi­nor ir­ri­tant. In France, they are sim­ply un­af­ford­able for many fam­i­lies.

That is be­hind the anger now turn­ing on the pres­i­dent. Mr Macron was elected on a platform of re­form and change. But there have been big prob­lems with his agenda so far – and there is no easy fix to them. First, he had no real man­date. True, Macron talked tough dur­ing the cam­paign. But his elec­tion was largely a fluke, as he oc­cu­pied the space cre­ated by the col­lapse of the So­cial­ist Party.

Who­ever got into the sec­ond round was al­ways go­ing to de­feat the Na­tional Front’s Marine Le Pen. He had no real grass-roots sup­port – for ex­am­ple, he raised more money in Lon­don than he did in the whole of France out­side Paris. There is a rea­son the pro­test­ers com­plain he is the pres­i­dent of the rich and the Parisian elite. He is. Next, his re­forms have been laugh­ably timid. There are some planned cuts in cor­po­ra­tion tax, but France will still have one of the high­est rates in Europe. There are tweaks to wealth taxes, but most coun­tries don’t even have cap­i­tal taxes and re­vers­ing those might well be his next con­ces­sion to the pro­test­ers.

And labour laws have been slightly loos­ened. But this is no more than tin­ker­ing. Fi­nally, he won’t chal­lenge the crush­ingly de­fla­tion­ary rules of the eu­ro­zone as the Ital­ians have done. Macron’s plan was to re­store French com­pet­i­tive­ness, and then agree a rad­i­cal re­form of the eu­ro­zone, in­clud­ing a new fi­nance min­istry to boost de­mand. It hasn’t hap­pened, and doesn’t look likely to now.

In truth, you can’t re­form an econ­omy with stag­nant de­mand. So far, Macron has been too des­per­ate to show he is a good Euro­pean by stick­ing to the eu­ro­zone’s bud­get rules. His one chance of suc­cess was a Rea­gan-ite pro­gramme of rad­i­cal tax cuts to im­prove in­cen­tives and re­flate the econ­omy. But that would have cre­ated a rup­ture with Brus­sels, and Macron wouldn’t risk that.

The protests, and his meek sur­ren­der to them, may have fin­ished him off. The im­pact on his pop­u­lar­ity has been pun­ish­ing. On Thurs­day last week, the lat­est polls showed his ap­proval rat­ings drop­ping to just 18pc.

A fresh wave of vi­o­lence has fol­lowed, erupt­ing in Paris over the week­end.

The real ques­tion for France now is what hap­pens après Macron. We will find out in the next few months – but it is un­likely to be pleas­ant.

‘France’s so­cial se­cu­rity sys­tem might be gen­er­ous, but it is also crush­ingly ex­pen­sive, at a total cost of more than €700bn a year, which must be fi­nanced by some of the high­est taxes in the world’

A yellow-jacket cam­paigner in Paris, af­ter what started out as a peace­ful protest turned vi­o­lent. Right, tear gas sur­rounds pro­test­ers and po­lice at the Arc de Tri­om­phe. Be­low, members of the ‘gilets jaunes’ move­ment dis­play their dis­ap­proval at the eco­nomic poli­cies of Em­manuel Macron, the French pres­i­dent, in­set

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