TELEGRAPH FEATURE: How did France get it so wrong?

“There are lots more kids on the street these days”, says Mohammed Trabelsi, trying not to gulp his coffee. “They don’t write that in the newspapers but it’s true. When my parents came here, France had lots of work. Now it has lots of fascists”.

Trabelsi is 23 years old. Born in Paris, to Tunisian immigrant parents, he holds a French passport and speaks good French. He is polite and articulate yet despite “searching every day”, he can’t find work. Having fallen through various social safety nets, and now deeply dejected, Trabelsi lives on the streets.

“I want a job but when the economy is down, there’s nothing for people like me,” he says, as we sit in a café in the French capital. “Some friends started dealing drugs and now they are dead. I have dreams and want to get on but the politicians do nothing. I still believe in myself, but some days it’s hard”.

France is the world’s fifth-largest economy. While Trabelsi’s life obviously isn’t typical, his plight is increasingly common and his words capture his country’s mood. France is woefully under-performing and many of its 66m citizens, up and down the income scale, whether working or not, face mounting financial pressures.

Social – and racial – tensions are rising, with mainstream politicians increasingly dismissed as remote. In May, Marie Le Pen’s far-right National Front won the European elections, attracting 25pc of all votes. Le Pen’s popularity has deeply unnerved the French political establishment, as well as those like Trabelsi who feel they’re vulnerable to racist abuse.

While the UK isn’t free of social problems or distrust of political leaders, when it comes to the economy the contrast with France is striking. Having grown only 0.3pc a year on average since 2008, France will register just a 0.4pc expansion this year, according to new International Monetary Fund forecasts. Britain, on the other hand, is set to grow by a buoyant 3.2pc.

Just 18 months ago, the IMF’s Chief Economist, Frenchman Olivier Blanchard, accused the UK of “playing with fire”, chiding the Conservatives for trying to rebuild confidence by pursuing tough austerity measures. This week, he changed his tune, conceding that Britain is “leaving the crisis behind”.

Since President Francois Hollande entered the Elysee in 2012, France hasn’t managed two successive quarters of economic growth. The former Socialist leader’s program of more regulation, higher spending and punitive taxation – not least his 75pc top rate of income tax, which has seen a flood wealthy French professionals move to London – is being widely blamed for this dismal French growth performance. The public finances have meanwhile worsened, with unemployment now stuck above 10pc, compared to 6.2pc in Britain.

Stark differences between the UK under the Tories and Hollande’s France have led to comparisons between Ed Miliband and the French President. The Labour leader has shown a similar reluctance to face up to budgetary realities – resisting Conservative spending cuts, then claiming he “forgot” to mention the deficit in his recent party conference speech.

Miliband’s proposed “mansion tax” on homes worth over £2m, like Hollande’s 75pc rate, has been condemned as unworkable, being slammed even by some of Labour’s leading donors. “The UK should be very careful not to repeat the mistakes now being made in France,” says Gaspar Koening, President of the think-tank Generation Libre. “The agenda of Ed Miliband, after all, seems very close to that of Francois Hollande”.

Back in the 1970s, the UK was the “sick man of Europe”. Now that title belongs to France. In a crowded field, which includes Italy, Spain and Greece, the Eurozone’s second-biggest economy is now viewed as the most problematic country on the continent.

“The mood here is extremely depressed,” says Pascal Lamy, the Former Director General of the World Trade Organization and Socialist party luminary, who remains an influential voice in France. “The 75pc tax, in particular, has been terrible for morale and also for Hollande, with the pain far outweighing any gain”.

The President has meanwhile failed to reform the sacred 35-hour week, in place since 2000 and, for many outside the country, the embodiment of French policymakers’ determination to ignore the competitive realities of an increasingly globalized world.

In August, the new Economy Minister Emmanuel Macron, a 36-year old banker appointed to help address Hollande’s anti-business image, floated that the 35-hour week might be scrapped. The minister had “made a mistake”, the head of the largest French trade union growled in response, adding that “the subject is closed”. The government then instantly capitulated, saying it had “no intention” of pursuing the reform after all.

“France continues to display it formidable reluctance to change,” says Lamy. “There are red lines on issues like working hours, pensions and the civil service that you simply don’t cross, not least as someone will jump on a soapbox and shout that reforms is an Anglo-Saxon plot. That’s why it’s over 40 years since France last ran a budget surplus”.

In September, Hollande indeed caved-in on the budget, admitting the deficit won’t be 3.8pc of GDP in 2014, as promised, but 4.4pc instead, up from 4.3pc last year. France won’t achieve the eurozone’s 3pc deficit target until 2017, the government now says, four years after the original deadline.

Such intransigence exasperates member states that have delivered painful reforms. It also infuriates Germany, the currency bloc’s paymaster-general, which is petrified the policy excesses of another eurozone nation could spark a disastrous systemic collapse.

“France was lucky during the last eurozone crisis,” says Bastien Drut, a French fund-manager who specializes in trading debt. “The markets targeted Greece, Ireland, Portugal, Spain and Italy. They then focused on France but, just in time, the European Central Bank came to the rescue”.

Drut is referring to ECB boss Mario Draghi’s 2012 pledge to do “whatever it takes” to save the eurozone. That implicit promise to buy the bonds of bankrupt countries using ECB money, never tested nor officially approved by Berlin, was just enough to draw financial markets back from the brink.

“That narrow escape is one reason France has since ignored budgetary reforms,” says Drut. “No-one realizes how close to disaster we came. Now, once again, France is taking major financial risks by spending far too much. Keep postponing deficit reduction and, eventually, the markets will attack you”.

Although other large Western countries are grappling with high budget deficits, the French state is uniquely bloated. Public spending accounts for a colossal 56pc of GDP, compared to 45pc in the UK. Social expenditure, including state spending on health care and benefits, is a third of French national income, compared to a quarter in Britain. “We are clearly spending way too much and can’t afford our vast welfare state,” says Drut. “Yet our politicians seem incapable of admitting they’ve offered too much”.

Solving fiscal problems is about controlling spending but also encouraging growth, so deficits and debts fall as a share of national income. Again, the French system could do much more to foster economic expansion. “We need companies to generate growth, not the public sector,” says Robin Rivaton, an advisor to the CEO of Aeroports de Paris and other corporate leaders. “France has some big listed companies, like telecoms and utilities, but they’re often owned by foreigners and their headquarters are abroad”.

The “natural entrepreneurial culture of France” has long been stifled by “crippling bureaucracy”, argues Rivaton. “We have great ideas but expanding a company beyond 5 people and then 50 involves mind-boggling red-tape,” he says. “The labour laws are so complex you need to employ an army of people to deal with them – which is why most good start-ups leave France”.

The 35-hour week and the French statist model are “totally unrealistic” and “many people want to change them”, Rivaton says. Certainly, recent polls suggest 61pc support for extending the legal limit on the working-week, with 56pc backing lower public spending. “French growth is crushed by politicians pandering to vested interests who are protecting their privileges,” says Rivaton. “This President’s policies, in particular, have been terrible for French growth”.

In a recent survey, Hollande posted a 13pc approval rating, the lowest for an incumbent in half a century. The latest polls suggest Le Pen would actually win the Elysee in a run-off against Hollande. While a lot can happen between now and the 2017 Presidential elections, it’s clear that unless the French economy rapidly improves we could see a political earthquake, the shockwaves of which would be felt way beyond France.

“This is one of the few countries on the planet where the majority of people, rich and poor, view the rest of the world as a threat,” says Lamy. “That’s why Le Pen is doing so well, because as the world gets more competitive, she is fooling frightened people that she can make it go away”.

This insecurity has its roots in ancient fears among the French peasantry about losing their land, Rivaton argues, combined with the trauma of the Vichy occupation – which produced, after the second world war, an overly-technocratic, dirigiste public sector. “This isn’t how France should be,” he says. “During La Belle Epoque [the late 19th and early 20th century], France achieved huge economic success and the state was barely involved, so allowing French creativity to bloom”.

The end of the La Belle Epoque was marked by the start of the First World War. One hundred years on, France’s Socialist Prime Minister Michel Valls was this week in London, trying to convince the Brits that “France is open for business”. The 75pc tax rate expires next year, he told us, adding that the French government may soon allow stores to open on Sunday.

As the French economy stagnates, rigid labour laws are meanwhile discouraging firms from taking on youngsters, increasing numbers of whom are dropping out of school. “Around 150,000 pupils a year are leaving with no qualifications,” says Amirouche Ait-Djoudi, an Algerian who came to France aged 3, and who now runs Impulsion 75, a support group for disenchanted youth.

“Young French people have far more problems – with their family, with addiction, with violence – than 10 or even 5 years ago,” says Djoudi, whose centre is co-funded by private money and has been granted space in a prestigious central Paris high school.

“There is deep pessimism about the future, not just among the poor but the middle-classes too,” Djoudi observes. “Many, particularly the young, lack confidence – so they’re not voting. And that’s helping Le Pen”.

Mohammed Trabelsi is among the thousands of youngsters who’ve been helped by Impulsion 75. “I used to be full of anger,” he told me. “They helped me to regain control and not give up. I’m a man and can’t be a coward. I must keep smiling, despite the pain.

France is in desperate need of an economic revival. But with the broader eurozone also suffering, the prospect of recovery seems distant. While the government has recently begun to sound more reformist – “we’ve lived for far too many decades beyond our means,” says Valls – there is little belief among insiders of a meaningful policy shift.

“France is long overdue a re-set,” says Lamy. “I really hope it happens, but I very much doubt it will”.

For decades, there has been a strain of thinking within the UK Labour party that France provides proof the high-spending, welfare-based model works. Ed Miliband represents that Gallic socialist wing of the party far more than, say, Tony Blair. Until recently, Miliband’s preference for interventionism, anti-wealth measures and glacial budget adjustment had seemed like smart politics, attracting just enough support to secure a Labour majority in May 2015.

As France stagnates, though, and social and racial tensions rise, the plight of Britain’s ancient rival may increasingly scare the UK’s crucial floating voters, pushing them away from Miliband’s statist vision.

http://www.telegraph.co.uk/news/worldnews/europe/france/11155877/How-did-France-get-it-so-wrong.html