France Begins to Drag Europe Down

Many commentators have today written about how the rate of decline in the Eurozone has accelerated, with activity in manufacturing, services & output data all reaching 3 or 4 month lows. However, few are singling out France which is now in a steepening decline not seen since the peak of the 2009 crash. Its economic data is so bad it is well below the EU average and risks making Spain look in good shape!

Here is the latest PMI data released today (numbers below 50 = contraction):

• Flash France Composite Output Index posts 42.1 (43.1 in February), 4-year low
• Flash France Services Activity Index drops to 41.9 (43.7 in February), 49-month low

It is my personal belief that several policy decisions of the Hollande government have contributed to this decline. There is a flight of French millionaires to places like Belgium and London due to the threat of a 66-75% tax rate on their income. Far worse in my few is a tax on entrepreneurship, which sees capital gains from investments in small business be taxed at over 60% … a massive discouragement to investors to risk their capital in France. That tax rate is double Germany’s and nearly triple Spain’s. This will have long-term damage on France’s economic future if not reversed. I’ve wondered for years why an entrepreneur would start any kind of international business in France, there are only disincentives.

France is now, finally, trying to reform in small ways to regain some competitiveness. The unions appear ready for compromise as large manufacturers face a real threat of bankruptcy. However 80% of France’s deficit reduction plan has come from raising taxes which is a major drag on any economy. This is stark contrast to the tax cuts for business and other measures being taken in the UK to stimulate job creation.

Until France does something about its extremely high tax burden (top 10 in the world), I fear the private sector will continue to fail to create much-needed employment. 10.6% of France’s work force is currently unemployed. This hits younger people the hardest, 36% of whom cannot find a job.