On April 22d, 2012, and May 6, 2012, the French will either pick themselves a new president, or they will give Nicolas Sarkozy another chance. This is a very important decision, not only for France but for theentire continent. France is the European country with the most troublesome economy, apart from the PIIGS, as the country's economy is currently in a limbo.
France's current debt level is 87% of its GDP and this number is expected to rise to 90.7% by the end of 2012 and 93.1% by the end of 2013. The country posted a weak GDP growth of 1.6% in 2011, and it is expected to post no growth in 2012 and a growth of 1.0% in 2013. At the same time, France will have annual budget deficit equaling 4.8% of its GDP in 2012 and a budget deficit equaling 4.4% of its GDP in 2013. Keep in mind that in 2011, the country's budget deficit in comparison to its GDP was 5.7%.
Obviously this is not a sustainable model and France needs to get either fast GDP growth, significant budget surplus or, ideally, both. The country's economy is a little more diverse and productive than the economy of the PIIGS; however the margin is not that great between PIIGS and France. If one of the PIIGS fails, there is a high likelihood that France will be in very big trouble. Moreover, the country's banks are full of bad debt from PIIGS and other resources. The country's largest banks may suffer from insolvency in the event of a default in southern Europe.
France Labor Laws
One of the biggest issues in front of France is the country's highly socialistic labor laws. In France, there are many generous employment laws that citizens of many other countries do not get to enjoy. Here are a few examples:
- In France, the working week is 35 hours. Employees working more than 35 hours a week receive overtime pay regardless of industry and type of business.
- In France, individuals are not allowed to work for more than 10 hours per day, unless there is a written agreement between the union of the individual and the company. In case of such an agreement, the work day may be extended to 12 hours, but not any further.
- Minimum wage in France is €1,321 per month. Considering that a work week in France is 35 hours, this comes down to $12.50 per hour.
- French employees are entitled to yearly vacation only after working a month out of a year. Full-time employees are entitled to take 2.5 days off for each month they work, which comes down to 30 days in a year. In addition, France has 10 public holidays where most employees are given time off.
- French employees cannot be fired for any reason. It is very difficult to fire individuals, as companies may face lawsuits for being engaged in any kind of employee termination.
Obviously observing these laws is very costly for French companies. As France is losing its competitiveness in the labor market, many French companies are moving their operations to other countries where they can do business without losing an arm and leg. This, in return, reduces the country's tax revenues when they are most desperately needed.
Social Spending
France also has very high social spending. According to OECD figures, the country's social spending amounts to 28.4% of its entire GDP, with healthcare alone costing more than 10% of the GDP. Social spending is very popular in France -- so popular that French people would rather pay high taxes than get rid of social spending. However, even with high taxes, the level of social spending seems unsustainable, especially given the aging demographics of the nation.
Candidates for 2012 Presidential Elections
There are currently four candidates for the presidential elections. These are Nicolas Sarkozy of UMP, François Hollande of PS, Marine Le Pen of FN and François Bayrou of MoDem. Because Sarkozy is already known by most and his policies are already observed, I will provide a summary on the three candidates he is facing in the elections.
According to the latest polls, the socialist candidate François Hollande is the most popular presidential candidate in France. He favors reducing dependence on nuclear energy and moving on to costlier energy sources, such as solar and wind energy. Furthermore, he favors increasing taxes even more in a country that already has high taxes. For example, he suggests an additional tax of 45% on individuals earning over €150,000 per year, and he plans to cap all tax deductions at €10,000 per year. He argues for increasing public spending even further and his plans include hiring an additional 60,000 teachers in public schools. Furthermore, he advocates constructing 500,000 new homes in France every year, 150,000 of which would be funded by government. Additionally, Mr Hollande is a big fan of reducing the retirement age back to 60, which helps him gain popularity in the country. Obviously none of these measures will help the country pay off its debt.
The second candidate, Marine Le Pen, argues that France should be able to borrow from the Central Bank of France, also known as Banque de France. She believes that the country can reduce its interest rates by borrowing from its own central bank as opposed to international markets. She argues that privatization of companies owned by the French government, such as French Post Office, would be against the interests of the government, even though these companies are currently operating at loss.
The budget cuts proposed by Le Pen so far would only be able to cut €30 billion a year from the budget of the government. She argues that the government should cut taxation on oil products by 20% in order to make gas more affordable. She also advocates a new corporate tax system where companies who return their profits to shareholders in shape of dividends and stock repurchases would pay much higher taxes than those who return their profits to their employees in shape of high salaries and bonuses. Le Pen also doesn't like the idea of eurozone, and believes that French would have higher purchasing power if France had its own currency.
The third candidate, François Bayrou, describes European Union as "the most beautiful construction of all humanity" and this view shapes his other views in all areas. He strongly believes that France should do whatever it takes to stay in Eurozone, including reducing its social spending, balancing its budget and paying off its debt.
In the latest polls, Hollande received support of 28%, Sarkozy was able to get votes of 27%, Le Pen was able to get 17.5% and Bayrou was able to get 12% of the votes. In the likely event that Hollande wins the elections, France's debt might increase even faster.
Implications
There is a high chance that France's debt problem will continue for years to come, as the strongest candidates in the incoming election do not seem to have a problem with the country's debt levels. Investors watching the situation in Europe should be cautious at least until after the elections in France.
Those holding French companies should also be cautious. There is a high likelihood that French corporate taxes will change after elections as most candidates advocate such change. Investors that own high dividend paying French companies such as French Telecom (FTE), Total (TOT) and Veolia Environment (VE) should be extra cautious. The effects of a new president on investors of these companies would be twofold. One, taxes witheld on dividends could change, altering the dividend yield one receives from these companies. Two, costs of these companies associated with employmees and taxation cut change, affecting these companies' earnings directly. A possible tax increase in France would cut earnings of these companies, and yields of dividends to be obtained from them.
I'm not suggesting selling or shorting; I'm just suggesting being cautious. As the elections draw nearer, I will write more about this topic to make sure everyone is aware of the latest developments.
