ANALYSIS: How bad will the post-coronavirus economic shock be in France?

ANALYSIS: How bad will the post-coronavirus economic shock be in France?
French Economy Minister Bruno Le Maire negotiates with European partners on what EU measures to take during the coronavirus crisis. Photo: AFPPhoto: AFP
The worst may not be over when the coronavirus crisis has passed, economists have warned. Here's a look at what France can expect as it enters a recession likely unseen since World War II.

France – along with several other European countries – has been forced to temporarily freeze large parts of its economy to limit the spread of the virus.

Since noon March 17th, France has been on a strict lockdown with most outside activity strictly forbidden.

The lockdown will likely be extended into May and French President Emmanuel Macron is to address the nation in a televised speech this evening.

“The economic recovery will be long, difficult and costly,” said France’s Economy Minister Bruno Le Maire on April 9th, as he announced that he would double the emergency budget to exit the crisis. 

France, like many of its peers, has chosen swift and hands-on state action to alleviate the economic losses caused by the health crisis.

They know that inaction from the state side could risk fatal economic impacts, with businesses going bankrupt and hundreds of thousands of people losing their jobs.

But there is only so much the state can do. Here’s a look at what lies ahead.

READ ALSO Will Macron be able to reawaken the sleeping French economy once lockdown ends?

France's Economy Minister Bruno Le Maire. Photo: AFP

How bad are things going to get?

As it stands, France’s GDP is expected to drop by 6 percent in 2020. Most economists agree that France is set for its biggest economic downturn since 1945. 

“There’s an overall consensus among economists that the recession will be worse than in 2008,” said Anne-Laure Delatte, an economist who works as a researcher at the French institutes CNRS (Centre national de la recherche scientifique) and CEPII (Centre d’études prospectives et d’informations internationales).

The 2008 crash – the most powerful jolt to the global financial system in modern times, with disastrous ripple effects on national level – was caused by the real estate bubble bursting, pushing the world banking system to the brink of collapse.

This time, the shock to the economy is caused by something more tangible – the nationwide lockdown which has halted vast numbers of the country's businesses.

 “People stop consuming and companies stop investing. It’s a vicious circle that amplifies the crisis and makes this a problem that is very difficult to address, ” Delatte said.

The lockdown

While economists disagree on many things, they agree that the main factor determining the magnitude of the economic crisis is how long the lockdown will last.

“Every month of lockdown costs us 2 to 3 percent of our GDP,” said Christine Lagarde, President of the European Central Bank (ECB), last week during an interview with France Info.

While last week brought some first positive news on the coronavirus numbers, it’s still too early to say when things will start to go back to normal. France does not yet have a concrete plan for the déconfinement (unwinding of the lockdown). 

And it's not only when but how the government ends the lockdown that will impact the economic downturn.

“If it’s done by age group and an extended period includes only those over 65 years old, the economic impact won’t be that significant,” said Xavier Timbeau, the Director of the French Observatory of economic conjunctures (OFCE), in an interview with Le Monde.

“But if (a continued lockdown) includes those over 50, it’s a very different story.”

At the same time, ending the lockdown too early could cause a backlash. A potential second wave of coronavirus cases could force the government to establish a new round of lockdown measures. 

 The EU last week declared that it would provide more than €500 billion in emergency aid to its member states. Photo: AFP

Government aid

Crucial in limiting the size of the crisis are the measures the French government has set in place during the lockdown. 

“It’s like an athlete who has to suddenly stop training and see all their muscles degrade,” Christine Lagarde told France Info.

“We need to continue working out a little every day so that we easily rebound the day we’re able to train again.”

As a metaphorical home exercising kit, the government is providing French businesses with emergency compensation funds, a €300 billion programme of state-backed loans for big companies and direct grants of €1,500 and €2,000 a month for small businesses and the self-employed.

To avoid mass layoffs, businesses may ask for chômage partiel (partial unemployment) for their employees. Over 6 million workers had registered for this scheme on April 8th.

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On Thursday, the EU agreed on a €540 billion emergency plan to keep their countries afloat during the health crisis. The EU agreed to continue the countries’ partial unemployment or furlough schemes and some €25 billion will go to the European Investment Bank to ensure that it continues to give loans to businesses.

“There is more money on the table today than in 2008,” Delatte said.

Still, she said, it was not enough.

“The stimulus plan in France could be more aggressive,” she said.

France has put 4 percent of its GDP ready to compensate for the economic losses. In comparison, Germany has dedicated 4.9 percent and the United States 11 percent of their GDP.

What about the debt? 

On the other hand, a more generous crisis package would lead to more debt after the crisis. Freezing down entire economic systems and then paying for it, straight out of the government’s pockets – all this is costing a lot of money. 

All countries worry about repelling investors because they need to raise money on the international market. 

“The debt will reach 112 percent of our national wealth,” Economy Minister Le Maire told Europe 1.

Getting rid of this debt will be a major challenge after the health crisis.

“One solution is sharing the debt between the eurozone to increase credibility among investors,” Delatte said. “If we work alone, we won’t manage.” 

While the French government has not yet laid out a plan, Bruno Le Maire had said that the economic rebound will be “a joint effort by all the French.”

Geoffroy de Roux de Bezieux, the president of MEDEF, the group representing employers, has said employees must prepare to work more than usual.

“Sooner or later, we will need to ask if (..) by working a little more, we can create additional growth,” he said

Maximum work hours, public holidays and paid vacation should all be the table, according to the MEDEF president – something that is unlikely to go down well with French unions.

But Gérald Darmanin, Minister of Public Action and Accounts, has shown reluctance towards a plan based on increasing taxes. The French are already the most highly taxed nation in Europe.

“I don’t think more taxes is the solution to the crisis,” he said.

'This is a matter of political will'

Delatte said France should have the debate on how to tackle the inevitable debt crisis sooner rather than later.

“We’re facing a massive health crisis and the debate on taxes would probably better reflect the society’s needs right now than in six months, one year when we’re hit by a new financial crisis,” she said.

If there was one thing the coronavirus should have taught us, according to Delatte, it was that the health sector – often viewed as a sector that vacuums public money – actually played a crucial role as a buffer to an economic crisis.

Countries with a robust health system like that of Germany will have less serious effects than those with a more fragile healthcare sector.

“When we stand in the middle of the economic mess, it will be difficult to resist spending cuts on things such as the health sector,” she said.

“We know how to address the economic crisis. This is a matter of political will.”


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