Britain will suffer as France pulls up the drawbridge

published 15 June 2014

The state of the French economy goes from bad to worse. Output is flatlining, unemployment remains stubbornly high, inward investment is collapsing, and exports are falling.

Some countries would respond by reforming their economy. But the French are instinctive protectionists. When they are in trouble, they pull up the drawbridges and blame someone else. It's already happening. Takeovers are being blocked. The government is protecting BNP Paribas from US fines. Far-right politician Marine Le Pen is riding high in the polls on a platform of trade barriers.

Who will lose the most from this, other than the French themselves? Unfortunately, we will. France is Britain's third-biggest trade partner, after the US and Germany.

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Our exports to the country are worth £19bn a year, and we have a huge stock of investment built up over many years. So the slow-motion car crash of the French economy is also going to be a significant problem for us.

France's woefully weak economy

President Franois Hollande was elected on a promise to reflate demand and cut dole queues by easing back on austerity. But it has not worked out well so far.

The latest data showed that the French economy is just a statistical whisper away from another recession. The jobless total is now 4% higher than it was a year ago. The budget deficit refuses to shrink. Last month exports fell by another 0.3%.

Inward investment has hit a quarter-century low. There is no sign of domestic demand coming to the rescue either.

France somehow needs to restore its competitiveness. That can only be done by devaluing its currency, or by slashing labour costs. But it can't devalue, because it no longer has its own currency and it shows no willingness to scale back on a lavish welfare system.The result? The economy will get worse and worse.

The traditional French response is to put up barriers. This, after all, is the country that invented mercantilist' economics the destructive idea that economics is a competition between states, in which one person's gain is another's loss. It is taking that path again right now.

The attempt by General Electric to take over France's Alstom has run into a barrage of opposition, with politicians trying to organise a German rescue instead even though Alstom has been in trouble for years.

The French bank BNP Paribas has been fined by US regulators for sanctions-busting as many banks have been. But because it is French, the government has been protesting to Washington about unfair treatment of a national champion.

More significantly, a transatlantic trade deal between the European Union and the US, which would extend the single market to North America, is threatened with being blocked by the French.

French finance minister Laurent Fabius has already warned he may veto the agreement if BNP is not given special treatment. And French parliamentarians are queuing up to denounce it.

Worst of all, the political running in France is now being made by Marine Le Pen's National Front. It is campaigning on a toxic mix of economic nationalism and protectionism, promising to putup trade barriers and increase welfare by cutting the retirement age, as well as leaving the euro. She may not win power but she is certainly setting the agenda in French politics.

France's woes will hurt us too

trente glorieuses

Yet, protectionism is the route the country is clearly taking. The problem is, this will hurt other countries too the UK most of all.

France is one of our closest neighbours, and still one of the world's largest economies. So it's no surprise it's one of our major trade partners. Other nations, such as China, are growing in importance as markets. But France is still a huge source of demand for British goods.

Worse, a belligerent, failing France is likely to make the EU more insular. The UK has the most open, free-trading economy in Europe. A transatlantic trade deal, for example, would have benefited British firms, with their close ties to North America, more than any others in Europe. So would similar trade deals in Asia or the Middle East, especially in strong British industries, such as financial services. If the French block them, then we will be the biggest losers.

There is not much we can do about the French drift towards protectionism. The nation has never welcomed advice from the British. But it is one more headwind the UK economy faces and the faster we can find new, fast-growing and more open export markets, the better.

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.