Fitch, the ratings agency, has downgraded France’s sovereign debt from AA+ to AA. This came as no huge surprise after a negative outlook in October, 2014, but procrastination has been the norm for a French government which has postponed its deficit-reduction commitments twice since 2012, writes Dr Emmanuel Martin.
No wonder systematic deviations between actual and planned deficits have made ratings agencies doubt the credibility of the French political elite.
The French fiscal situation in 2014 is a good example with a deficit of 4.4 per cent instead of the 3.8 per cent expected anticipated earlier this year. France is simply unable to control its growing debt.
And the outlook for growth remains weak at 0.4 per cent GDP growth in 2015 with Fitch thinking French growth will be below the European Union average in 2015, at 0.8.
It would be difficult to expect more growth given the punitive levels of taxation and complex regulations. Most growth now comes from government consumption.
France still enjoys historically low borrowing rates because it is perceived by markets and investors in Europe as too big to fail. To a certain extent, this induces a form of moral hazard for French politicians - an incentive to postpone real reforms.
It is only pressure from the ratings agencies and European partners which has forced President Francois Hollande’s government to launch a series of reforms. But these are only one small step in the right direction, and far from enough to solve the problem.
Even Minister of the Economy, Emmanuel Macron, failed to convince the ratings agency it seems. The 106-measures in Macron’s law could probably unleash some growth potential - from enabling more Sunday work, opening nationwide coach lines, or deregulating some of the old ‘regulated’ professions such as notaries.
But despite all this effort, they are scratching at the surface and the deep structural issues in France are not being tackled. A radical simplification of labour law and serious reform of French administration and public spending are still wanting.
French Minister of Finance, Michel Sapin remains optimistic on the ability of new policies to support companies and make them more competitive. But a glance at figures for French business bankruptcies in 2014 and jobs lost in the third quarter should sweep away this optimism. Both are at historic highs.
The pro-business rhetoric, adorned with a few liberalisation measures here and there, will not mask the French disease forever. Not undertaking real reforms soon is a threat to France and to the whole of Europe.