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GHEI: French follies

Big-spending socialist policies ruin economies

- The Washington Times - Thursday, July 12, 2012

When your president is a socialist, expect a lot of denial. So it is with France's new leader, Francois Hollande, who wants more public-sector benefits, increased government expenditures and higher taxes as his country crumbles. Mr. Hollande denies spending has anything to do with the French economy shrinking 0.1 percent in the second quarter, nor the fall in industrial production of 1.9 percent. His policies likely will push the fragile nation further into recession, deepening the euro crisis.

The French government's red ink has hit 90 percent of gross domestic product, which is well into the danger zone where debt acts as a drag on growth. Standard and Poor's has already stripped France of its AAA credit rating. Despite that, the nation did succeed in selling some of its most recent bond offering at negative rates, with three month bonds selling at an absurd -0.0005 percent. The low cost of debt, however, is not so much a reflection of confidence in France as it is a result of the abysmal performance of her neighbors, Italy and Spain. Investors still view France as safer than those nearly bankrupt countries, although that is not exactly a ringing endorsement of the place.

The structural problems in France are deep and enduring, particularly in its labor market. It has the highest cost of labor in the EU, at a staggering $42 an hour. The high pay comes with less productivity, as Frenchmen are only expected to spend 35 hours a week on the job. That change, implemented in 2000, pushed French unit labor costs 20 percent higher than Germany. The effect of indolence can be seen in the decline of French exports in the global market. In addition, French companies are burdened with 3,200 pages of regulation designed to eliminate an employer's flexibility to adjust working conditions to meet marketplace needs. The long-term union contracts also make it extremely difficult for younger workers to find jobs, leaving as many as 25 percent of them unemployed.

Government jobs remain the gravy train on which one in four French citizens will continue to ride. Instead of easing up on the public dole to make ends meet, Mr. Hollande's solution is to punish the private sector. His best-known proposal imposes a 75 percent tax on those with an income of 1 million euros ($1.2 million) - a move that prompted British Prime Minister David Cameron to remark that he would "lay out the red carpet" for French businesses looking to move out of France. Great Britain, not exactly a low-tax jurisdiction, has recently cut its top rate from 50 percent to 45 percent. There is little doubt that Mr. Cameron's invitation will be accepted by some French citizens and businesses, further fueling the tension between the two countries which are already at odds on the imposition of a tax on financial transactions.

Mr. Cameron has the right idea, and lawmakers in Washington should pay attention to it. With the highest tax on businesses of any country in the developed world, America has seen its economy sputter. If we keep acting like French socialists, we'll end up surrendering our economic future to nations that show more respect for free-market principles.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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