The relationship between ECB policy and the economic performance of France

Today the Governing Council of the ECB (European Central Bank) meets to announce its monetary policy decisions. It does so in a very different environment to its more recent meetings because of the way that the economic winds of change have blown. What I mean by this is that the economic outlook is the brightest it has seemed for a while now. Also consumer inflation has risen to pretty much on target which poses a question for ECB policy going forwards as I have been pointing out for a while now, most recently last Friday. There is a clear contrast with the United States where expectations of an interest-rate rise this month are pretty much 100% now. Yet there is a problem as we note this from @fwred on the Atlanta Fed forecast for US economic growth.

Potentially HALF the growth rate of the euroarea in Q1.

This has led to hints of a change today this morning.

doesn’t plan to announce a new round of TLTROs, according to people familiar with the matter” ( @bondzilla )

So if true it will scrap a bank subsidy.

However I wish to take the opportunity of the second anniversary of the major QE program of the ECB to take a look at the impact it has had on France and its economy. It has provided a deposit rate of -0.4% a balance sheet heading towards 4 trillion Euros and thereby a lower level for the Euro although of course we can never judge any policy in isolation. The QE purchases have meant that 269 billion Euros of French government bonds have been bought easing its fiscal policy via the fact that it has some negative bond yields and only has a ten-year bond yield of 1,03%. So whilst that has become increasingly expensive vis a vis Germany it is also as Middle of the Road pointed out some years ago.

Chirpy, Chirpy, Cheep, Cheep, Chirp

The French economy

Lets look at it with a different twist as the particularly francophile Financial Times has looked at the French economic situation. It has done so on a political beat but for me the issue is monetary policy as over the period in question ( since 2012) it has been monetary policy that has been the main economic player in town.

The winner of this year’s election will inherit an economy that has been growing slowly but steadily since the 2008 financial crisis……..However, as the chart below shows, despite modest growth the country has underperformed relative to the likes of Germany, the UK and the US. Nevertheless, towards the end of Mr Hollande’s term things began to pick up. Growth last year reached 1.1 per cent, the fastest pace during his tenure — though it still fell well below the EU average of 1.8 per cent.

Let me just correct a factual error with this from the French statistical office.

On average over the year, GDP rose by 1.1%, practically as much as in 2015 (+1.2%).

So in annual terms not the fastest rate although it is quicker than 2012,13 and 14. In a way cheering an economic growth rate of ~1% poses its own question in an era where we have tentatively described the new normal as 2%. But if we skip the UK and US there is an issue in a currency union where growth is consistently below the average and the country which is considered with France at the heart of the Euro project which is Germany. The solution for that would be regional policy but quite how that would manifest itself I am not sure.


The numbers here continue to be awkward to say the least.

unemployment continued to creep up to a high of more than 10 per cent, prompting the president — late in his tenure — to take more decisive steps to tackle what he labelled an “economic emergency”……..unemployment figures have shown only marginal improvements over the past year,

There are other worrying features of the French labour market as well.

The reforms have so far failed to break France’s two-tier labour market. Last year, 86.4 per cent of total hiring was into temporary jobs — and of those, 80 per cent were for contracts shorter than one month. Meanwhile, long-term unemployment remains stubbornly high: more than 45 per cent of the unemployed in France have been without a job for more than a year, the highest proportion since records began in 2003.

It is not a good time to be young in the French labour market either.

France’s youth unemployment rate is roughly double that of the UK and continues to rise — in contrast with a decline in most advanced economies. The story is similar for foreigners and those with lower levels of education.

Accordingly the quantity number unemployment remains poor in spite of all the monetary easing and a chill wind blows through if we add in the reforms promised because the situation has not changed all that much. Also “emergencies” seem to last these days don’t they as I think also of the UK “emergency” Bank Rate of 0.5% which somehow went even lower to 0.25%!

If you are employed in a permanent job in France you have better conditions and perhaps better pay than in the UK. But for those outside such a position the outlook is worse, although some aspects seem the same as “contracts for less than one month” are not a million miles away from zero hours contracts in principle.

The state

This is larger in France than in many other places.

But France still has one of the highest public spending ratios among advanced countries — at 57 per cent of GDP. Within that, health, social and pensions expenditure as a share of GDP remain comparatively high and have risen since 2012.

Of course there are beneficial consequences of this as many French people are proud of their health system. Whilst the ECB continues with its QE bond purchases the fact that the national debt to GDP ratio is 97.5% matters little but of course unless France finds some economic growth we are left with what happens if the ECB stops buying?

House Prices

Let me throw in something which is not mentioned by the FT. If you look at French houses prices they were in the autumn of 2016 where they were in the last quarter of 2007. I do not know about you but with all that has gone on in the credit crunch era that seems so much healthier than the UK situation. What do readers think?

There is a catch though ( as ever…) as we consider the mortgage books of the French banks.

Regulation and Taxation

The Financial Times struggled here to present an optimistic picture.

Despite attempts at simplification, French companies “are still faced with a high regulatory burden and fast-changing legislation”, according to a recent European Commission report………At 48 per cent, the labour tax wedge was the fifth highest in the OECD in 2015 and French corporation tax remains the highest in Europe.


There is much to consider here and there are of course problems with using GDP as a yardstick. It is a long way from perfect but in essence monetary policy in the Euro area has been trying to drive it higher using the excuse that it is bringing inflation back on target. But for France there has been an improvement but only to a growth rate of around 1% so far. The opening of 2017 looks better but can that be sustained for the several years required? Along that road the ECB would have all sorts of questions to answer if it maintained its stimulus.

Something that should particularly benefit French business is the corporate bond buying program but as it has bought more than 10% of Euro area corporate bonds already how long can it go on? For a start it is anti-competitive especially if you do not qualify.



14 thoughts on “The relationship between ECB policy and the economic performance of France

  1. High unemployment, 1% growth, high public spending, overburdensome employment laws, high corporation tax, over subsidised archaic agriculture, mounting racial tensions – what a cocktail for stability and wellbeing!

  2. Great blog as always, Shaun.
    INSEE produces two sets of GDP estimates, does it not? One is with coke and hookers for Eurostat and another, which they believe in, for themselves. Could that have something to do with FT stating that the annual growth rate for 2016 was a recent record. I looked at the Eurostat table for (presumably annualized) quarterly growth rates for the French economy for the four quarters of 2016: 1.2%, 1.1%, 1.0% and 1.2%. They didn’t even come close to the (presumably unadjusted) growth rates I downloaded as part of an Excel table (“supply and use in chain-linked volumes (WDA-SA data)”: 0.7%, -0.1%, 0.2% and 0.4%. Try to annualize the INSEE numbers and it doesn’t make it any better : 2.8%, -0.4%, 0.8% and 1.6%. Only the 2016H2 figures for INSEE are even in the same ballpark as Eurostat’s.

      • Thank you, Shaun. You are right as usual. The INSEE estimates you show in the attached link do match the quarterly growth rates are mentioned. I was in the wrong pew for the Eurostat estimates, looking at the annual growth rates. Their quarterly growth rates match the INSEE estimates. I think that INSEE does produce two sets of estimates for GDP though, one of which doesn’t match with Eurostat, although this doesn’t seem to be it. Sorry, I am not operating on all cylinders today.

  3. I have a suggestion regarding changing France’s national symbol (Marianne, the Goddess of Liberty) to something more apposite. My suggestion is Micky Mouse as, despite being claimed to be Europe’s most successful theme park, Disneyland Paris, which opened in 1992, has yet to report a profit! Naturally all the original investors have been wiped out 100% due to the 7 or 8 financial restructurings that have had to be undertaken over the past 25 years to keep it afloat. Indeed it’s getting worse; for example in 2016 on total revenues of 1,278 million euros it managed to lose no less than 858 million euros.
    Those with long memories will no doubt recall that the UK “lost out” to Paris in the competition to “win” this foreign inward investment, mainly due to the French State offering huge incentives such as diverting their High speed rail line to service the park, building a new station specially for it and providing nearly 2,500 hectares of prime development land. In one sense at least it’s remained true to Disney’s notion of “The Magic Kingdom”, a place far, far removed from reality!

    • Hi Rob

      Those are some quite extraordinary numbers to say the least! Whilst Eurotunnel had plenty of restructurings I do not think that it ever got so bad that losses were around 2/3 rds of turnover. It also poses a question as to how you measure GDP for such a place.

      I was supposed to go there some years back but was unable to so the only Disneyland I have been to is the one at Anaheim LA.

  4. I was just looking at the 2007 house market last night (England & Wales Land Registry data – god bless open data sources). What I found is that the total housing market is actually still well down on 2007 (about 14%). In other words, although prices have risen (by 27%), they’ve not risen as much as number of sales have dropped (32%). In addition, there’s a huge swathe of negative-equity outside of the property hotspots. So much of the reporting is driven by these hotspots that it’s easy to get the idea that “it’s 2007 all over again” but there’s important differences, not least of which is that many people who bought in 2007 are still facing selling at a loss and might be until their mortgages end in 10 years time or so, and beyond.

    So, for example, while Brentford in London has gone up a massive 85% since 2007, Gunnislake in Cornwall – an area that had a lot of speculative buying in the boom – is still 20% down on where prices were 10 years ago and this is much closer to being typical than any part of London is.

    What this all means is another question; I’m seeing a reflection of how hard it is to get started on the ladder today, so there’s a lot of trade in high-value property that doesn’t go to people scraping together their first deposit and relatively little even at the other end because a lot of property is locked up by negative equity and a reluctance or inability to bear selling at a loss.

    • Hi TW

      I agree that the property problem has many features much of the UK has in Goldilock’s terms porridge that is too hot but others have it too cold such as Northern Ireland and the places you mention. The turnover point is valid as well and questions all the statements about wealth gains as they are unreliable to start with in my view but with a lower level of transactions they deteriorate further.

    • Thank you for an incisive emotion free comment on the Housing Market.

      Your piece of analysis has been more revealing than the 100 odd “expert” reports I have read. Perhaps I’m operating confirmation bias here as it is my own experience that there has not been much of a “boom” in my area although there are pockets of new developments where prices are astronomical but they sell very very very slowly, in fact so slowly that quite a few builders have gone bust stubbornly waiting for sales at inflated prices and refusing to drop their prices.

  5. Shaun, France may have poor growth but it’s citizens have a much better lifestyle than we do imo, so which do you prefer? Long hours, relatively poor pay over priced housing below mediocre health care alongside a poor state pension and benefits system with OK GDP growth or much less hours, good pay, realistically priced housing, a very good social health care system and very good benefits and state pension but with poor GDP growth?

    Over to you.

    • Neither country has a sustainable economic position, in that both are running persistent deficits. IMHO both are likely to face economic crisises which require savage cuts.

      PS. I’m not a neo-con and don’t want/like savage cuts, just fiscally conservative. Failing to live within your means leads to bankruptcy & poverty.

      • Agreed but that does not answer my question.

        In the here and now which do you prefer? Put another way you can have the nice French existence and then go bust or the not very nice British existence and still go bust…..

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