However, GDP is measured in two ways. The Real GDP measures changes in real income excluding changes in prices but only of output, whereas Nominal GDP combines both changes in output and prices (ie. Inflation). If the GDP value is positive, it indicates an economic growth, where if it is negative it indicates an economic recession. An increase in GDP implies that national output has increased.
As we can see from Figure 1, France's Real GDP has been rising until 2008 and had a decline in 2009. If you compare this with other countries you can see that France has been following the same trend, especially with the rest of Europe and America. However, it has been many years since France's GDP has been negative and there are many reasons why this fall in output has occurred.
Consumption, which normally is the largest GDP component, has been reduced dramatically. With unemployment rising 1.6% in one year, consumption by France residents is reasonable to fall as well. With consumers having less to spend in general and even less on luxury goods, consumption was inevitable to fall. This would inevitably have a negative effect on investment by firms as well. The rise in unemployment had a negative impact and a negative implication on investment. For companies, by having to release a large part of their labour shows that there was not enough money to invest to new capital. Also, since unemployment has risen, it shows that consumption has fallen, which leads to lower incomes for the companies and even less spending power to invest.
In addition, the fact that exports are severely affected from the fall in tourism surely had a negative effect on GDP as well. Worldwide tourism has fallen 4% during 2009 and with France being the most visited country in the world and the third country with the largest income from tourism this surely caused a fall in the GDP.
Balance of Payments
The balance of payment account measures the net transactions between domestic residents and the rest of the world. It consists of the current and the capital account and if both of them are added the result should equal to zero. However the result is almost never zero and hence some countries have either a deficit or a surplus.
Figure 2
As we can see from Figure 2, France's BoP is has been negative over the years but during 2009 it has been reduced significantly. However, the government must still try and ensure to either reduce the deficit or make it a surplus so that they can establish France as a growing economy overall.
The recent economic crisis - how it affected the country
During the last two - three years the most common theme in all newspapers is the global economic crisis which exploded in all countries. A large number of people believe that the crisis affects only the Third World but this is not true since it is 'global' financial crisis and the economies of countries depend on each other. This might have more implications on bigger countries such as France than smaller ones since the economic factors are more and the number of people who live and work in the country is greater. France is one of the EU economies that encountered the global economic crisis better than the other countries. The reason is because it has more resilient consumer and government spending and lower exposure of the downturn in global demand.
People go on strike very often due to fear of losing their jobs since unemployment is now rising at its fastest rate in more than a decade. A higher number of people wanted guarantees on job protection and a higher minimum of wage. As you can see from the chart below, economic crisis affected the employability of the country and the rate of unemployment is increasing continuously. According to the Financial Times the rate became more than 10% which is much greater compared to the 2009 and 2008 rates, 9.7% and 7.4% respectively.
Figure 3
Economic and financial crisis influenced the country in many sectors. The jump of unemployment has cut demand and caused a fall in the output. Many people lost their job and they couldn't find a new one. Additionally, salaries were reduced significantly and as a result people are buying only the necessities and are restrictive to primary goods. Consumptions and investments decreased, sales were failing down and these had cut demand. Consequently many companies of the business industry filed into bankruptcy. An example of such businesses is Air France. The firm offered to 1500 employees a voluntary redundancy plan in order to reduce its expenses.
Furthermore the crisis affect the GDP of France since the percentage of GDP has strongly relation with the rate of unemployment. As we mentioned before due to the economy crisis the rate of unemployment increased and due to that the GDP decreased.
It was necessary to find effective solutions for the scourge of unemployment and for the problems caused by the economic crisis. President Sarkozy said he would not take austerity measures or use tax hikes as a way to fight the effects of the financial crisis and therefore he introduced certain tax cuts and welfare payments for lower income families. He also focused on public and private investment but refused to consider unions demand for hikes or job protection due to the huge budget deficit that was dramatically caused by the economic crisis. Mr. Sarkozy also offered a compensation to the people who lost their jobs or to those who face economic problems.
Furthermore in 2009 France made a reduction of the rate of VAT from 19.6% to 5.5% in restaurants and cafes and President Sarkozy promised that he will increase the number of workers in all food-businesses by creating 20000 permanent jobs and giving the chance to recruit 20000 people as trainees. Additionally Mr. Sarkozy pointed out that the best way to decrease the number of people who are willing to get a job but cannot is by investment. People will have the chance to get a new job and thus will increase the output and the demand of the country. The government also offered support to all businesses -existing or new- by giving them money and services.
Competent must try to mitigate the effects of the economic crisis since French people cannot work and be productive in an environment with no protection in their work. The government must take serious the demands and give as soon as possible solutions in order to get the economic in a better situation.
Monetary and fiscal policies
Monetary policy is usually carried out by the Central Bank and Monetary authorities and involves: setting base interest rates and influencing the supply of money. Since France is a member of the European Union, in 2002, adopted Europe's common currency, the Euro, and adopted also the common well-functioning European monetary policy which is administrating by the European Central Bank (ECB). This institute and its current French president Jean-Claude Trichet decide the interest rate in all Eurozone.
During the last years president Mr. Sarkozy, asked from the Central Bank to reduce the interest rates as he was planning to increase its country exports in order to stimulate the economy and increase the consumption. Nowadays the interest rate after a downturn stands at 1% and this change will influence developments in economic variables such as output or prices.
Figure 4
Fiscal Policy is carried out by the government and involves changing the level of government spending and taxation.
As a result of the economic crisis the government agreed to an incentive plan in February 2009 (€26 billion) which is focused on investment in infrastructure and tax breaks for small businesses. In addition in order to protect French companies from foreign takeovers, Paris shaped a €19 billion strategic investment fund. Mr. Sarkozy proposed also a €39 billion plan for strategic investments regarding technology and science and also committed to tax reductions of €11 billion to address the problem of unemployment in his country. These different investment measures are contributing to a drop of France's public finances.
"In the Eurozone, fiscal policy decisions are made by 16 different governments. They are supposed to be guided by benchmarks governing the levels of government debt and deficits -- with limits set at 60 percent and 3 percent of GDP, respectively." (Real Clear Politics, 16/03/2010)
France's tax burden is one of the highest in Europe with rate approximately 50% of GDP. With the president opposing new taxes the French budget deficit has risen 3.4% of GDP in 2008 to over 8% of GDP in 2009 well above the limit imposed by the EU and the country has been given until 2012 to return within the 3%. The reason of this deficit is the economic slowdown and the government stimulus program of €26 billion equivalents to 1.3% of GDP.
Conclusion
In conclusion, France has not managed to keep its GDP reduction to low levels but this was inevitable due to the reasons explained above. However, to the government's credit they have managed to lower their BoP deficit and they have also managed to adopt policies which can only help the country's economic growth get back. However, faced with increasing budget deficits and the need to provide aid to sectors ravaged by the global economic downturn, France asked special treatment from Europe since the French president wanted to have more flexibility to implement its economic program.
After deeply analysis of these policies we can conclude that French government follows a strategic plan which is the best for its country. However the recent recession shows that Monetary Policy may have a lot of limitations as cutting interest rates may prove insufficient to boost demand because banks do not want to lend whilst at the same time households are willing to wait until rate lowers, therefore the consumption remain in the same levels.
