Video

#SaxoStrats
Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 23 March 2016 at 11:00 GMT

France fatigued from a lack of reform

Managing Partner / Spotlight Group
United Kingdom
  • French manufacturing PMI posts March decline
  • Socialist policies have frozen France's competitiveness
  • ECB purchases distorting French yield curve

Paris
Paris may be home to one of Europe's most imposing business districts, 
but the economy is tied up in regulation. Photo: iStock

By Stephen Pope

Markit Economics said on Tuesday that manufacturing shrank for the first time in seven months as the French manufacturing purchasing managers index shrank to 49.6 in March from 50.2 the month before. However, the research group added that the French economy showed signs of a faint improvement at the end of this year's first quarter.

This was because the services PMI rose to 51.2 in March from 49.2 in February, moving back above 50, the level in this diffusion index that separates expansion from contraction. This was the fastest pace of activity seen in five months.

On balance ,the gain in services was just enough to push a composite gauge of private-sector economic activity to 51.1 – a five-month high.
France PMI Create your own charts with Saxo Trader click here to learn more.
Source: Markit 

France, like all other open market economies has been buffeted by the slowing economic performance of China, falling commodity prices, the uncertainty that brings, and a slowdown across most other emerging markets.

As a consequence, successive surveys have indicated that confidence among French executives has been on the decline. French industrial confidence stood at 103 in February of 2016, unchanged from January, but down from 104 at the end of Q3'15.

This is reflected in the fact that the manufacturing base of France is failing to make use of its resources. To support the downturn in the manufacturing PMI one can see in the data from INSEE that capacity utilisation in France decreased to 80.70% in Q1'16 from 82.40% in Q4'15.

A road to nowhere

France has shown the world that it is gripped by a paralysed mentality when it comes to business and wealth creation. It is a curious cultural quirk that given France has more companies listed in the world’s leading 500 corporations, 35 versus Germany's 30. Business is regarded as something grubby, that needs to use the side or back door rather than be welcomed with a red carpet and celebrated.

Indeed, since the election of François Hollande as President in 2012, France has fallen in its global competitiveness. The World Economic Forum reported that France is the 22nd most competitive nation in the world out of 144 countries ranked in the 2015-2016 edition of its Global Competitiveness Report. 

 It was 18th in 2012 when Hollande was elected and French competitiveness rank averaged 18.70 from 2007 until 2016, reaching an all-time high of 23 in 2014 and a record low of 15 in 2007.

Labour and management, a politically motivated divide

The relationship between labour and management is a perfect way to illustrate the difficulties that France continuously refuses to deal with effectively. President Hollande has directed the government to review a draft labour law that proposes to remove constraints on French firms when client orders demand a longer working week so that orders can be fulfilled.

The proposal is to devolve to employers the right to negotiate longer hours and overtime rates with their own trade union representatives as opposed to following rules established by national, industry-wide deals.

That sounds encouraging, until one has to take on board the fact that the 35 hour cap would remain in force. There will be no flexibility as every minute worked beyond 35 hours has to be at an overtime rate… well, OK, I am all for pay for extra hours, but surely the extra hours should be for the employer and employee to decide rather than having a state-imposed additional cap at no more than 46 hours for a maximum of 16 weeks. 

This sounds like a set of boundaries designed to force companies to hire more workers even if there are short, seasonal surges in product demand.

One could say why not let the company factories or assembly plants work for a shorter number of extra hours for a longer period during the year. That however implies that inventory levels will rise, tying up much-needed working capital. Even so, it could only apply to non-perishable products.

Surely in a free-flowing labour market it should be for the worker and the employer to strike an agreement that is fair and not harmful to health, work efficiency and product quality. Overtime demands will vary from one industry to another – it does not need an arbitrary ruling from the state.

The Economist reports that French workers would welcome a chance to let unions and bosses in each industry and at each firm negotiate the terms and conditions of all future work overtime arrangements. The sense of having “micro”-led work arrangements take the lead is being stymied by a dogma that wants to work with a “macro” or centrist policy. 

Sadly, the proposed law has not addressed all the rigidities of the French labour code.

Politics paralyses progress

How much longer can France be allowed to get away with the dead hand of left-wing doctrine wrecking the upside potential of the French economy? For those politicians that are red in tooth and claw, the concept of the 35-hour week is untouchable, just like the “Fermeture Annuelle” or “Annual Shutdown” in August.

French strike
None of this does much for growth. Photo: iStock 

Some claim it is a badge of progress for workers’ rights. No… it is an example of a lost opportunity as it means missing out on missing out on valuable tourist expenditures. Being in France during August is a mixed blessing as the weather is delightful, but very little is open.

One can find cases where one might begin to think that France is seeing sense. There are cases of workers putting in more than 35 hours per week, but France uses this situation to find another way to ruin its competiveness. It is not enough that workers who put in an extra shift earn a higher rate of pay for the extra hours, they also receive an additional boost through extra holidays to compensate.  

At Électricité de France or EDF, the average work week has recently been 39 hours and in addition to the extra income the workers are given an extra 16 days off each year on top of the regulation five weeks’ holiday. Tell that to a worker in the US… 41 days of paid vacation. It is as incredible as it is irrational.

Why is the state meddling? In a free labour market, the worker should be at liberty to decide if they want more money and less free time or work and earn less and have more free time. Clearly Franconomics plays by different rules, as workers can have both.

Left lurching toward the exit

The left has such a grip on French politics – with 323 seats out of 577 or 60% of the votes – that even staging a challenge to the labour laws is extremely difficult. French prime minister Manuel Valls has had to postpone the presentation of a draft proposal of labour law changes to the cabinet. 

The very idea led to excessive disunity in the Socialist party and saw a threat of street protests by unions and students. So if the draft law cannot be discussed in the Socialist Party cabinet there is no prospect of it seeing the light of day in the National Assembly where the Broad Left, Communists and Greens would strangle such a proposal at birth.

Martine Aubry, Mayor of Lille and an architect of the 35-hour week ideal publically accused the Prime Minister of selling out the basic socialist ideals. She accused him of plotting to make redundancies easier and undermining workers’ rights.

I say it is the mayor of Lille and the former first secretary of the French Socialist Party who is unwilling to trust the workers. What is to be feared by letting individual workers agree to their own terms and conditions?

She is also guilty of showing the world that the president is weak and cannot control his own party.

What is good for workers is work, not political dogma or an unemployment rate of 10.3%.

The president recently claimed he was pro-business. If so, he should stamp his authority on the Socialist Party and tell them to get a grip and live in the real world. Both he and his prime minister are being made to look foolish and are on course to face defeat in the next election. Of all the potential candidates that Hollande could face in a final run off during May 2017, the only one he could defeat is Marine Le Pen.

Even if the economy does pick up this year, it will be insufficient to bring down unemployment and the state, with debt-to-GDP at 96.2%, has no room to use pump priming measures to boost spending. For too long, France has enjoyed a low yield structure it does not deserve given that of the large liquid bond markets in the Eurozone. It is not second best, just least bad. The great European Central Bank distortion has played a masterful hand in masking that reality.

Ten-year debt at 35 basis points over Germany and two-year at 4.9 basis points over is unjustified and any investor who believes a French government yield curve that demands the investor pay France for taking its money right up to the six-year mark really does need to have a rethink.

Investing in French state debt will only deliver a positive return if one acquires seven-year paper. Even then if one adopts a buy-and-hold mentality the yield to maturity is just 0.051%. Still, by that time such an issue is maturing, i.e. 2023, the reign of president Hollande will just be a footnote in the history books.

— Edited by Michael McKenna

Stephen Pope is managing partner at Spotlight Ideas. Follow Stephen or post your comment below to engage with Saxo Bank's social trading platform.
3y
Krunil48 Krunil48
Dear Stephen, I seem to remember from one of your previous articles that you came out (on balance) as pro-EU in the referendum. One of my objections to remaining in the EU is that if the UK works longer hours, has less holidays and less employement protection/ union rights, why should the UK be a net contributor to Europe thereby subsidising for example French farmers through EU subsidies? I do not know enough as to the extent of subsidies etc and perhaps you would consider me a 'little Englander' but perhaps you understand my point? (I recently saw a TV program where the french were shown as being almost offended if they did not have a 2 hour lunch break with a restaurant quality meal, mid-day. Is the British worker subsidising that, and will continued membership of the EU mean ever-greater 'socialist' rules, regulations and dictats imposed on the UK economy?).

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail