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French President Francois Hollande reacts as he speaks to journalists in the courtyard after a meeting at the Elysee Palace in Paris May 17, 2013. French President Francois Hollande called on Thursday for an economic government for the euro zone with its own budget, the right to borrow, a harmonised tax system and a full-time president. (GONZALO FUENTES/REUTERS)
French President Francois Hollande reacts as he speaks to journalists in the courtyard after a meeting at the Elysee Palace in Paris May 17, 2013. French President Francois Hollande called on Thursday for an economic government for the euro zone with its own budget, the right to borrow, a harmonised tax system and a full-time president. (GONZALO FUENTES/REUTERS)

FRANCE

Recession causes grief for Hollande on election anniversary Add to ...

When François Hollande was campaigning to be president of France a year ago, he won on the promise “change is now.” There has certainly been change since then – for the worse.

Mr. Hollande marked the first anniversary of his victory this week just as France’s statistical agency reported that the country’s economy had officially sunk into recession, the second since 2009. And that wasn’t all.

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On Thursday, Mr. Hollande held a press conference that lasted nearly three hours. Dressed in a dark suit and perspiring at times, he outlined his plans for the second year of his five-year term and tried to explain just how things got so bad. Take just about any measure. More than 3.2 million people are out of work, an all-time high. The unemployment rate stands at 10.6 per cent, a post-war high, and roughly 25 per cent of people under the age of 24 don’t have a job. Exports are down, the national debt is up, consumers aren’t spending and business confidence has plummeted. Throw in some political scandals and it’s no wonder Mr. Hollande’s approval rating has dropped from around 60 per cent to 24 per cent, a new low for a President after one year in office.

France falling back into recession has ramifications beyond its borders. As Europe’s second-largest economy, any slowdown here is bound to impact other nations, particularly those in the 17-member eurozone, which all use the euro. And then there is Germany. France has long believed that membership in the eurozone and adopting the euro in 1999 would help it narrow the gap with Germany in Europe, both politically and economically. That hasn’t happened and, if anything, Germany dominates Europe as much if not more now than it did before the euro. And while Mr. Hollande pushes for more European integration, as he did Thursday, his German counterparts have remained cool.

“Of course there is impatience,” said Fleur Pellerin, a deputy finance minister whose job includes the task of selling the country to foreign investors. “When times are tough, people want to see results right now.”

Ms. Pellerin rhymes off a long list of government accomplishments, from reforms to France’s rigid labour laws to tax breaks for small businesses, spending cuts and efforts to deal with soaring pension costs. “We think, we believe, that all these measures for the last six months are going to start producing effects starting from now.”

Maybe, but France’s challenges didn’t emerge last year or even last decade. Government spending has been rampant for decades, something that didn’t matter as much during the boom times of the early 2000s but has become crippling since the 2008 financial crisis. France’s national debt has doubled in the past 10 years and is now equal to just over 90 per cent of the country’s total gross domestic product, a record high. As Ms. Pellerin likes to point out, every newborn in France starts life with €27,000 of debt over their head. And it is expected to keep rising.

The labour market has also long been a source of inefficiency. From a 35-hour work week to union contracts that are almost impossible to break and a minimum wage above $12 an hour, among the highest in the eurozone, France has created a largely inflexible workplace. In an effort to get around the rules, many employers hire workers on short-term contracts, offering no security and fewer benefits. The government’s recent reforms increase benefits paid to short-term contract workers and make it somewhat easier for companies to lay off workers during economic downturns.

France also has one of the highest personal income-tax rates in Europe, something that has funded generous social programs but hampers consumer spending when times are tough. State pension plans, too, are generous, kicking in with full benefits at age 60 for some workers, but they now face soaring deficits and there is talk of raising the retirement age.

And then there is the eurozone, where more than half of the nations are in recession, battered by crushing debt loads, staggering real-estate losses and soaring unemployment. Nearly half of France’s exports head to eurozone countries and many of its largest companies, the auto sector in particular, are almost totally reliant on Europe.

But not everything is bad. France’s economy stacks up well among European countries, says Simon Tilford, chief economist with the London-based Centre for European Reform. Economic growth has been better than most eurozone countries since the financial crisis; productivity is higher, as is foreign investment. “France is not the sick man of Europe,” Mr. Tilford said. “It’s definitely unhealthy, as the whole of Europe is, but it’s definitely not the sick man.”

This week, Mr. Hollande vowed to “go on the offensive” and tackle the country’s economic woes. He promised new spending programs and plans to push for more integration among eurozone countries.

Ms. Pellerin knows it won’t be an easy sell. Polls show a rising number of people, like many in Britain, have become leery about the eurozone and question whether France should stay in the European Union. “We need to think of a model” for Europe, she said. “We need to put some hope in the European project.”

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