By Luc Jodet, an Energy Policy Analyst at Futur Facteur 4, Paris
France’s sticky administration means reform is difficult. Return to growth may be a blip.
A surprise expansion of the French economy in the second quarter of this year after six months of recession provided hope that President François Hollande’s policies may finally be working. During a rare one-hour interview on public television earlier in the year, Mr. Hollande promised to deliver a “choc de simplification ”, or a drastic reduction in the level of administrative challenges French businesses face daily.
Cutting down bureaucratic procedures by a factor of two or three could help keep France out of recession but is hard to achieve in practice. One third of France’s working population is in the civil service. It has 400,000 standards currently in place. Trimming those down will have a positive impact on France’s budget balance. The ongoing global financial crisis coupled with a stubborn European fiscal crisis makes eliminating red tape crucial for its ailing private sector, where the margin rate is at the lowest level it has been since 1985.
The Organisation of Economic Cooperation and Development (OECD), a think tank for developed nations, estimates the cost of excess administrative procedures in France at around €60bn or 3% of GDP. In 2009 alone, €65bn in public subsidies were distributed to French companies. By reducing red tape, France could virtually double its supply side stimulus while simultaneously reducing its budget deficit. A consequent increase in private sector competitiveness could bring much needed economic growth and tax revenues.
Since the beginning of the 2008 recession, the competitiveness of the French economy has been a subject of heated debate among both domestic and international commentators. According to the World Bank’s annual Doing Business Index, a study which ranks countries on how easy or difficult it is for small and medium-size enterprises to operate within particular jurisdictions, France ranks 34th out of 185 countries worldwide and 21st out of the OECD’s 31 high-income countries. France dropped down two spots this year compared with 2012.
According to the report, the main reason for this is the difficulty of transforming France’s abundant number of small businesses into medium-size companies, something their German family-owned contemporaries have been successful at. Starting a business is easy; France ranks 27th in the world due to reforms made in the early 2000s reducing the time needed to create and register a business by approximately 15%. Medium-sized businesses are however burdened with complex procedures to obtain construction permits and register property. Since the late 2000s, France has somewhat eased restrictions for obtaining construction permits but reforms have not proven sufficient. Reforms of property registration procedures have only reduced the overall time taken by a third, making France among the poorest performing countries for ease of registration, according to the survey.
France still has much room for improvement in simplifying mandatory administrative procedures to support economic growth. But the challenge is political: can France’s labyrinth of red tape be streamlined with minimal fallout?
Nicolas Sarkozy, the former French President from the right of politics who describes himself as business-friendly, first encountered this problem when he attempted a similar initiative in 2009. The situation is as complex today as it was then.
Alain Lambert, former budget minister from 2002 to 2004 under Mr. Chirac’s government, explained in a report he co-authored that sectors carrying the most excessively bureaucratic standards were environmental protection, food safety, and healthcare. Those sectors are also the ones where strong regulation is deemed politically necessary. Executed soundly, regulation in these sectors could have the greatest positive impact on French well-being for generations to come. Legislators are thus reluctant to eliminate procedures from these sectors, for fear of being accused of jeopardising the health of France’s citizens and the future of the planet.
In France, the legislature has passed annual public budget deficits for more than 30 years without meaningful reforms. Reducing public spending has become unavoidable. Mr. Hollande’s call to simplify administrative procedures is an important part of the solution for France’s weak economy. But it will take courage and resilience to convert rhetoric into change. To make matters worse, in June France’s national auditor the Cour des Comptes warned Hollande’s plan does not go far enough, predicting the country will miss its deficit target this year.