France Seems To Be Following Italy Economics Essay

The Financial Times Article France seems to be following Italy by James Mackintosh ask the disputing inquiry if French republics economic system is the following mark of investors and fudge financess and follows Italy with its high involvement rates on authorities issued debt. At the minute bond market is still in favor for France but the writer describes similarities such as the low fight of both states compared to other states such as Germany and Spain and the high unemployment rate. The writer besides highlights the differences between Italy and France. For case the debt to national end product ratio and the primary balance is really different between France and Italy. ( Mackintosh, 2012 )

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The existent GDP per capita determines how much end product each person of a state contributes in norm to the national income. The existent GDP per capita comparing between France and Italy in Error: Reference beginning non found shows that the Italy ‘s spread to France increased since 2005 from around EUR 4000 to about EUR 6000 GDP per capita. But the existent GDP per capita was stagnating in France while the existent GDP per capita of Germany was increasing from EUR 26,900 in 2005 to EUR 30,200 in 2012 by 12 % . One ground for the development in France could be the rise of unemployment, because if less people are working the existent GDP per capita lessenings. Therefore the following paragraph will analyze the unemployment state of affairs in France and Italy.

In this essay I will at first analyse the economic development and mentality of France compared to Italy and their authorities debt before I will give suggestion what France should make to increase its fight, initiate economic growing and manage its authorities debt job.

The current history of France ( amount of its balance of trade, its net income, and its net current transportations ) is negative since 2005 and the current history of Italy is negative since 2001. With its export orientated economic system, Germany had a current history excess above 5 % in that period but its surpplus is expected to fall below 5 % in 2013 and 2014. To better the current history balance France, Italy and Spain must increase the fight of their economic system so that they can export more and need to import less. Mistake: Reference beginning non found shows that the IMF is gauging the current histories of Spain and Italy to go better than that of France in 2013 and 2014.

For an analysis of the fight Mistake: Reference beginning non found provides a closer position of the entire labor cost development. The labour cost of France and Italy increased by 15 % and 12 % respectivly from 2005 to 2012, while the labour cost of Germany increased merely by 4 % in the same period. Interesting is the development of Spain, it has an labor cost addition of 15 % between 2005 and 2009 and reduced its labor cost as a consequence of the finacnial crisis by 6 % . This is important advantage for German companies, who have can bring forth at a lower fringy costs. Furthermore Italian and Spanish companies besides increased their fight against Gallic companies.

The gross outgo research development ( “ GERD ” ) measures the private and public sector disbursement on research. In Mistake: Reference beginning non found you can see that France has a higher GERD than Italy and Spain but besides that Germany ‘s GERD is bigger than that of France. To increase its competitiveness France should lift its disbursement on research and happen inducements for concerns to make the same.

Mistake: Reference beginning non found illustrates the Gross Domestic Product ( “ GDP ” ) growing rate for France, Italy, Germany and Spain since 2005. While France have had a higher GDP growing rate than Italy in the ascertained period and a better growing rate than Spain since 2009, its GDP growing rate was worse than that of Germany since 2006. Although the International Monetary Funds ( “ IMF ” ) estimates that the growing for France in 2013 and 2014 additions once more and outperforms that of Italy and Spain these estimates are still really moderate with a GDP growing rate of 0.4 % and 1.1 % severally.

Harmonizing to the classical economical position France has compared to Italy a disadvantage due to its minmal rewards which led to unemployment. From the Keynesian position these minmal rewards are better than lower rewards because workers can pass more and increases the aggregative demand of the economic system. In my sentiment the major ground for the high unemployment rate in France is non its minimum rewards but instead its rigorous labor ordinance, the its non buseness friendly environement as mentioned above, its deficient fight and its instruction system, which will I analyze in the following paragraph.

France has performed in the last OECD pupil appraisal similar to the OECD norm while Spain and Italy underperformed against this mean ( see Mistake: Reference beginning non found ) But France instruction system needs to better to make function theoretical accounts states such as Finland and Korea as instruction is a cardinal component for future growing.

Monetary Policy

Because of the pecuniary brotherhood France and Italy are confronting two jobs First in the Eurozone they have a fixed exchange rate with capital mobility, which means that they can non deprecate their currency if they want to increase their fight and cut down their existent debt. ( Gold Standard )

The unemploment rate of France increased from 8.4 % in 2007 to 10.7 % in the thrid one-fourth of 2012. Mistake: Reference beginning non found shows a similar development for Italy, which had a low of 6.1 % in 2007 that increased up to 10.7 % in 3rd one-fourth of 2012. Germany reduced its unemployment rate from 8.7 % to 5.4 % late, gaining from its more flexible labor market and “ Agenda 2010 ” reforms intorduced by Gerhard Schroder. The existent unemplowment rates in France and Italy are both excessively high with 10.7 % but Spain has an even bigger job with an unemplowment rate of 25.5 % .

Another fact is that most little Gallic companies maintain their figure of employees below 50 because the strong ordinances apply for companies that have 50 or more employees ( Viscusi & A ; Deen, 2012 ) . These ordinances cut down the inducements for little Gallic concern to turn and get down ups to take France as location.

Second outside the pecuniary brotherhood they have a floating exchange rate but the state of affairs is still non hone for their economic system. On the one manus the exchange rate is excessively strong in relation to their economic system and export degree due to some strong economic systems in the currency brotherhood. Strong economic systems like Finland, Austria and Germany benefit from ( in their position ) weak Euro because their merchandises are much cheaper on the universe market than if they would hold had their several individual currency. On the other manus large portions of its rivals have the same currency, which means that there is no competitory advantage due to the same currency rates.

In drumhead France can non utilize pecuniary instruments to increases its fight and act upon its economic system.

But although the instruction consequences are on OECD mean, France needs skilled workers as welders, applied scientists and cooks. Harmonizing to the Bloomberg Buisnessweek the Gallic instruction system is non able to accommodate its educational preparations to concern demands. ( Beaupuy, 2012 ) .Therefore France has to alter its instruction policies so that the following coevals is ready for the occupations the labor markets needs.

Another of import factor for assesing the economic mentality of a state is the gross authorities debt to GDP ratio. An of import difference between Italy and France is illustrated in Mistake: Reference beginning non found. France debt to GDP is with 90 % in 2012 still much lower than that of Italy with 126 % . The 2nd difference is the budget. France is expected to run a primary ( before involvement ) shortage of 2.2 % of GDP while Italy will hold a excess of 2.9 % ( IMF, 2012 ) .

The fact that Italy already introduced an asceticism bundle, pension reform and steps to contend revenue enhancement equivocation improves the debt to GDP ratio appraisals of the IMF for 2014 for Italy.

France needs to alter its labor market ordinances. First it has to cut down the obstructions for little companies to engage more than 49 employees. Second they have to cut down the employer societal security part to increase the fight of its concerns. The decrease of the pensionable age from 62 to 60 was a measure backwards. France should hold instead increased the pensionable age to cut down the societal security part costs.

Furthermore the instruction must be adapted to the concern demands. Therefore an apprenticeship system like in Switzerland should be introduced. In this vocational preparation each trainee spends one or two yearss a hebdomad at school but most of his/her clip at the employer. Because the employers have a high involvement to engage trained learners the quality of the instruction is really high and adapted to the concern existent demands.

The Gallic authorities financial end are to excite its economic system to increase its growing rate and at the same clip it has cut down its disbursement to maintain new debt below 3 % of its GDP. Harmonizing to Keynes cutting public disbursement will take to a decrease in GDP that is depending on the income multiplier. ( see below equation ) .

So the higher the multiplier the more is a alteration in the authorities outgo act uponing the GDP. As the multiplier is relative to the revenue enhancement rate lower on the other manus increases the GDP because the disposal income additions.

Therefore the Gallic authorities must be really careful what outgo it increases or decreases. It should concentrate on long term oriented investings such as research, substructure and inducements for companies to put more.


France outperforms Italy in the GDP growing rate, in the GERD to GDP, in the OECD instruction index and in the authorities debt to GDP rate. Italy is similar to France in its unemployment rate, it current history balance. It is better than France in its labor cost compared to the degree 2005 of both states and has in contrast to France a primary budget excess. Nonetheless France needs to better its fight, work out the high unemployment rate, and excite its economic system to turn to cut down its authorities debt.

Therefore France should accommodate its instruction system, cut down its indirect labor cost, incentives concerns and run a balanced asceticism plan so that economic growing is still possible.

I do non belief that the market ask for a higher hazard premium for Gallic authorities bond in the close hereafter. This premise is based on the undermentioned facts. First although France lost its triple-A recognition evaluation from Moody the involvement rates recovered really fast and a now on a depression of 2.05 % . ( See Mistake: Reference beginning non found ) . Second compared to Italy and Spain, France existent economic figures are better.

But I besides believe that France must desperately get down a painful alteration procedure so that it non becomes the following Italy. In my sentiment it is impossible for France to work out the quandary of merely borrowing 3 % of GDP and to increase its fight, therefore I would urge France to concentrate to increase its fight as a long term end and accept that its debt addition for the following two old ages up to 4 % of its GDP.


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