THE BLOG

Bullish on France

Where is France headed? The economic news remains grim. Youth unemployment especially is a major concern. President Hollande has had a tough first 17 months in office, and the country almost seems to take pride in being one of the most pessimistic places on earth when asked about its future. Unlike Americans who seek happy solutions for every challenge, the French are not temperamentally prone to optimism.

The French economy is clearly at a danger point: a serious structural deficit, archaic labor laws, an overly large public sector, high tax rates, and the need for more entrepreneurial incentives. There is also, at times, a sense of denial. France's challenges were brilliantly catalogued a year ago by Sophie Pedder, the Paris bureau chief of The Economist in her book (not yet in English), The French Denial: The Last Spoiled Children of Europe. France has not had a balanced budget since 1974 and, for decades, like the United States, has made more promises than it can now afford. Today's sense of French malaise has also been compounded by occasionally inconsistent or anti-growth government initiatives. The good news is that more French realize that the current situation is unsustainable. As Herbert Stein, President Nixon's chief economist, once quipped, if something is unsustainable, it will stop.

All the things we like about France and point to as successes -- fast trains that run on time, perhaps the world's best early-education system, open access to post-secondary education that doesn't create massive student indebtedness, high quality and affordable health care, efficient nuclear energy, a growing commitment to sustainable urban development -- have been paid for by growing levels of public debt. The issue for France is not about scrapping these achievements but, rather, restructuring them to make them more affordable and viable in the long run. Doing so will require significant changes to the tax code, the funding of public and private pensions, the retirement system, and the national mindset.

Take two important areas of French success which offer lessons for Americans: education and health care. When compared with the United States, France continues to make considerable public, human capital investments in its young people. The system of "crèches" and "écoles maternelles" is universal, relatively inexpensive, and provides high-quality child care and early education starting at three months after birth. President Obama earlier this year called for quality universal Pre-K education, but our approach is nowhere close -- in substance, scale, or quality -- to the investments long made by France.

At the high-school level, the baccalaureate exam is required for all graduating French students who want to pursue post-secondary education. While not perfect, the French "bac" at least represents a standard of what young French students are expected to know and be able to do after their secondary education. We are gradually headed in this direction through the effort to develop a system of Common Core Standards, but far too often we award high school diplomas to students who can't do second-grade math.

If a French student passes the "bac," post-secondary education is virtually free. The Sorbonne in Paris, for example, is an open-access university with a relatively modest cost. True, some of the elite schools like Sciences-Po have recently raised tuition -- but nowhere near the levels of comparable U.S. institutions. In the U.S., we tell our young people that they need more post-secondary education than ever before to be globally competitive, and we effectively then force them to assume crippling "mortgages" to pay for it. That's how we end up with $1 trillion in student loan debt.

Last year while visiting Le Havre, I talked with a young waiter working two jobs to save enough money to go to school to specialize in international law. I asked him how much money he needed, and when he told me 4,000 euros, I almost laughed. He was astounded when I told him that a similar degree in the U.S. would most likely cost him at least ten times that amount, per year.

And then there's health care. The French spend half per capita what the U.S. spends on health care -- and yet the French enjoy greater longevity, have markedly lower rates of obesity, and show far better infant-mortality results. Visit a French doctor's office and you will not see a wall of files and staff whose sole job is to handle insurance claims. Most French medical records are electronic. Patients are charged a modest co-payment (most of which is later reimbursed), and physicians are paid in a matter of days. The public-policy implications are obvious: How can France spend about half as much as we do on health care and get substantially better outcomes?

When most Americans think of France, they think of culture, style, food, wine, "joie de vivre," and historical nostalgia going back to the American Revolution, when France was among the first three nations to recognize U.S. independence. There is a reason why France remains the most visited country on earth. The French are keenly aware of these "quality of life" attributes, and that fact explains, in part, why reform will entail a struggle. But I credit the French for their growing recognition that change must occur, and this change will occur against the backdrop of trying to preserve aspects of what they already have -- rather than having to create these institutions from scratch.

What tourists to France do not always see are the technology centers like Sophia Antipolis between Nice and Cannes on the Riviera; the world-class doctors, engineers, IT experts, and math professionals graduating from outstanding universities; the high productivity levels associated with the French workforce, notwithstanding vacation periods that Americans envy; and world-class companies such as Accor, AXA, Danone, EADS, Essilor, l'Oréal, LVMH, Michelin, Publicis Omnicom, Schneider Electric, and Sodexo. The Fortune 500 includes more French companies than any other European country, and the website www.lafranceestunechance.fr includes an impressive list of French success stories.

Both England and the United States experienced similar periods of economic malaise in the mid-to-late 1970s. High inflation and unemployment coupled with a need for serious structural reform gave way to sustained periods of economic growth and prosperity. Many of those reforms were associated with strong leadership from Margaret Thatcher and Ronald Reagan who were also able to change not only the economic climate but also instilled a sense of optimism about each nation's future.

The first stage of reform is to recognize the need for change. That is now well underway in France. Moreover, that growing sense of urgency contrasts with a sense of gridlock and complacency in the United States. At least France does not have the American campaign finance system that all but ensures paralysis until the next major crisis arrives. The Great Recession had its origins in New York, not in Paris.

The U.S. lurches from one debt ceiling and budget crisis to the next. We apply band-aids rather than embrace structural reforms. Our entitlement programs -- which are clearly unsustainable economically and demographically -- remain unreformed after 20 years of talk. Our structural deficit can continue a bit longer because other countries are still willing to accept U.S. dollars. That willingness is limited, however, and one can envision a future reckoning -- a collapse of the dollar and/or higher inflation -- if we do not fix our fiscal mess. France remains constrained in its economic options by the euro -- a constraint that may, in the near term, be a net plus if it forces France's political leaders to act sooner rather than later.

Francois Hollande's socialists now control virtually all levels of government in France. They clearly have the capacity to effect the necessary changes. Their challenge is to pursue the needed structural reforms while also maintaining aspects of French life that other countries can only envy. Success will require political courage and a delicate balancing act. President Hollande has shown such courage on the international stage, and I remain optimistic that he will hit his stride domestically as well.

The views in this article are solely the author's.

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