France’s Main Problem is Socialism, Not Elections

France’s Main Problem is Socialism, Not Elections

France’s Main Problem is Socialism, Not Elections

Following the European elections, the French credit default swap has soared to a post-2020 record of 39 points.

Many commentators blame the rise of the National Front for market turmoil, which has sent all euro area spreads higher. However, none of this would have happened if France’s debt was low, finances were strong, and the euro area economies enjoyed healthy economic growth.

France is the world’s poster child for statism. The same statism that some politicians seek to impose on the United States has economically devastated France, a wonderful country with excellent human capital and outstanding entrepreneurs.

France never had austerity. It has the world’s largest government relative to the size of the economy. Government spending to GDP exceeds 58%, the highest in the world. Unions are exceedingly powerful. Their ability to organize paralyzing strikes gives them a level of economic power that far exceeds their actual representation. France’s state is so large that the public sector employs 5.3 million people (21.1% of the active population), a ratio of civil servants to inhabitants of 70.9/1,000, according to Eurostat. France has one of the highest taxation systems in the OECD. In France, income tax and employer social security contributions combine to account for 82% of the total tax wedge, according to the OECD. Corporate tax rates in France are also extremely high, at 26.5%, with companies with profits of more than €500,000 paying a rate of 27.5%. The labor market regulations in France are so restrictive that the number of companies with forty-nine employees is 2.4 times higher than those with fifty, primarily due to the significant burdens businesses face once they reach the fifty-employee threshold. According to Bloomberg, a 50-employee company must create “three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons”.

If you are a Keynesian statist, you must be salivating. The above-mentioned characteristics point to a perfect socialist society, an enormous state, extremely high and progressive taxes, and an enormous social network. It should be the optimal economy. Or not?

Well, no. France has been in economic stagnation for decades; it has not had a balanced budget since the late 1970s, and discontent is now the norm. Businesses and taxpayers have grown weary of the drain on their resources, and the subsidy system has spawned a group of dependent and irate citizens who feel left behind and struggle to comprehend their situation. The hailed social state has failed because the massive subsidy and spending machine has ignored economic calculation, making the country a nightmare for job and wealth creators, as well as a nightmare for those looking for a social net that provides opportunities. France has shown that the promise of socialist redistribution only creates stagnation. Despite its claims of extremely low inequality, at 31.5% Gini coefficient, it is one of the European countries with the highest level of discontent, insecurity, and entrenched impoverishment among citizens rotting in ghettos.

Socialism always disregards economic calculation and the need to promote growth and wealth to make progress. When maintaining a bloated state and redistribution become the only objectives, the economy stagnates, and everyone is angry.

The problem with France extends beyond these elections. Voters have the choice of deciding between statism, more statism, or outright communism. Fascinating.

Decades of agonising tax hikes and misguided immigration policies, which have alienated even those admitted into the country, have left taxpayers exhausted and law-abiding citizens terrified. The economy is experiencing low or no growth and declining productivity growth, resulting in weakened real wage growth, heightened insecurity, and crippling taxes. What are you reading in the media? “The threat is the far right.”. No. The threat is statism.

According to Bloomberg, none of the three possible alternatives to the government will decrease the debt or curb the deficit. None of them will tackle the government’s bloated size. Two want even more state control of the economy, while one wants lower taxes as the only evident pro-growth policy. However, those tax cuts are unlikely to attract much activity when administrative and bureaucratic burdens continue to weigh on the economy.

France has the potential to be a global economic leader. It has the talent, the entrepreneurial spirit, and the business expertise to create global leaders. However, the system simply expels them from the country. Many of France’s brightest have emigrated to other nations where they can thrive. Unfortunately, the political elite are extremely happy keeping the so-called state champions filled with politicians and a small group of crony sectors that are too afraid to raise their voices against the bloated state because they could suffer the wrath of government. A select breed of intellectuals and brave businesspeople are trying to change the system from within, and unfortunately, they are failing.

The lesson we can learn from France is that trying socialism never works and once the disastrous results are evident, it is almost impossible to correct the problem. France is an enormous problem in the eurozone, and the ECB cannot disguise it. But do not think this is a unique example. France is now at the tip of the iceberg. The disastrous Next Generation EU Fund and a deaf European Commission are currently covering up the much worse structural issues in Spain and other euro area nations.

France shows why no one should try socialism. The euro area demonstrates why no one should imitate the statist model that French politicians impose.

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Daniel Lacalle

Global Economy Expert

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

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