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French Economy: Regaining Growth in the Midst of a Pandemic

27 Aug 2020
By Kareem Salem
Tourists taking safety precautions in France during the COVID-19 pandemic.
Source: Rosivan Morais,

Amidst an increase in COVID-19 cases, Emmanuel Macron and his government face the challenge of rebuilding French economic capacity.  Ensuring the viability of the automobile and aerospace sectors is a top priority.

In France, the coronavirus pandemic will be remembered not only for its high mortality, but also for its devastating impact on the national economy. The proliferation of the virus across the French society required authorities to establish strict social restriction measures to curb its spread. This policy inevitably necessitated the closure of all non-essential economic activities.

The resultant health security measures required action from the French government to prevent mass unemployment. A state-subsidised furlough scheme called “chômage partiel” was launched, under which fixed-term workers received partial unemployment benefits from the government. In the Hauts-de-France region, more than a million workers registered for the chômage partiel scheme, which included employees in the automotive and construction sectors. According to Fitch Ratings, the program covered almost half of the French workforce. To prevent companies from bankruptcy, the French authorities also provided €300 billion in state-guaranteed loans to struggling companies that needed them.

Inevitably, these confinement measures have had an impact on France’s economic output. The aggressive lockdown led to a 5.3 percent contraction in the French economy, which is not expected to return to pre-crisis levels until mid-2022. The National Institute of Statistics and Economic Studies has revealed that French economic growth will fall by 9 percent this year. Amidst this predicament, non-essential businesses have been allowed to operate, and strategic sectors have received financial assistance to alleviate the financial pressure incurred during the confinement. However, the path to wealth creation remains strewn with many challenges.

These challenges are particularly visible in the French aerospace and automotive sectors. Both sectors are significant sources of employment and wealth creation: the automotive sector has 4,000 companies, generates 900,000 jobs and accounts for 16 percent of French turnover, while the aerospace sector has 1,300 industrial companies, 300,000 jobs, and generates €58 billion in annual turnover. However, both sectors have suffered significant losses due to the restrictions. The automotive industry suffered an 80 to 90 percent loss in business, while in aerospace manufacturers, especially  Airbus, incurred a loss of €500 million. While both sectors have been recipients of the French government’s financial recovery packages, companies in these sectors continue to feel pressure to reduce their workforces in order to absorb the shock of the pandemic.

The continued threat of company downsizing and the subsequent increase in demand for unemployment benefits is a source of concern. The French government’s recovery packages to the automotive and aerospace sectors, among others, will expectedly move the public deficit to 120.9 percent of GDP by the end of the year due to large-scale government support for these sectors. Despite granting a €5 billion recovery package to car manufacturer Renault, the company still intends to enforce the layoff of around 4,600 jobs in France as part of a plan to save around €2 billion over the coming three years. In the aerospace sector, chief executive officer of Airbus Guillaume Faury also endeavours to cut 5000 jobs in France despite the French government providing a €15 billion recovery package to the sector and the option of receiving chômage partiel for two years. This underscores the importance for the French government to continue to identify public policy solutions to prevent aircraft manufacturers from experiencing further operational predicaments.

The €40 billion that France is due to receive from the recovery fund negotiated at the last European Council summit should be used by the French authorities to invest in efforts to maintain jobs in the aerospace and automotive sectors. This should be a priority for the government considering the importance of both sectors in generating growth and employment for the French economy. Given that air transport will continue to be affected by the global health crisis which for aircraft manufacturers will mean continuing decline in demand for new aircrafts, French President Emmanuel Macron and newly appointed Prime Minister Jean Castex will have to consider nationalising Airbus in order to protect France’s leading aircraft manufacturer from continuing liquidity problems.

Regarding the automotive sector, if the health crisis remains under control, the national authorities should approach car manufacturing companies in which they are shareholders to engage with trade unions and find solutions to employment challenges. Constructive dialogue should remain focused on reducing companies’ expenses on wages and entitlements, in order to maintain employment. To gain trade union acceptance, senior management should impose a salary freeze on all executives, which will demonstrate their commitment to preserving jobs and their willingness to control fixed costs.

The French authorities should also consider easing the corporate tax rate. In 2018, the OECD said France had the highest tax rate of all developed countries. In 2019, the standard corporate tax rate increased by a surcharge of 3.3 percent, giving an effective tax rate of 32.02 percent. Macron should instruct the Castex government to consider a further reduction in the corporate tax rate to rejuvenate the capacity for business innovation. The French President wants France to become a European production centre for the manufacture of environmentally friendly cars. Easing the corporate tax rate will improve France’s ability to achieve this.

For the economy to recover, the French authorities must also build a more sovereign health sector. The COVID-19 pandemic has brought to light the fragilities of the globalised world economy, calling into question the foundations of the globalised system in which trade liberalisation has fostered the outsourcing of essential production activities abroad. Indeed, the health crisis has notably highlighted France’s dependence on protective masks and essential medical products from China.

After decades of encouraging business offshoring, the present economic situation requires the French authorities to create the fiscal conditions necessary to encourage the repatriation of high value-added production centres. Currently, in the pharmaceutical sector, between 60 and 80 percent of active ingredients necessary for the manufacture of medicines are manufactured outside the European Union. Production tax credits and regulatory easing are necessary to entice the repatriation of pharmaceutical production. French authorities have recently promised to allocate €120 million to local research and development to produce drugs to combat COVID-19, while plans for the localised development of paracetamol have also been launched. These measures have potential, given the country’s large pool of skilled human capital from which high-value research entities can draw into their activities. This policy should be recommended to all high value-added sectors in order to create new employment and generate new wealth in the French economy which will upgrade France’s competitive advantage across skill intensive industries.

Kareem Salem is a freelance journalist and holds a Masters in International Relations from the University of New South Wales in Sydney, Australia.  

This article is published under a Creative Commons License and may be republished with attribution.