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ECON1102 Macroeconomics 1

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Economic Environment of France

Foreign market avails both opportunities and risks to multinational corporations. Before deciding to establish a business overseas, an investor should understand the economic situation of the country. Some of the economic indicators the investor must know include unemployment, inflation, Gross Domestic Product, political stability, and the rule of law (Sloman, Wride and Garratt 42). This report, therefore, examines the economic environment of France to help IEKEA company to decide whether or not invest in this country.

Key Macroeconomic Indicators

Gross Domestic Product

The Gross Domestic Product is used to estimate annual changes in the inflation-adjusted value of the entire services and goods generated by the economy. It is a broad gauge of economic activity as well as the main sign of economy’s health. GDP is considered an essential indicator of assessing the economic progress of a country. The rate of variation of the real GDP is commonly known as economic growth and is the best measure of ups and downs in an economy (Frank and Bernanke 35). The economy of France is the six largest globally. The real GDP of France increased by 0.6% in 2014, 1.3% in 2015, and 1.3% in 2016.  Currently, the service industry is the major contributor to France’s economy, with approximately 78.8% of the GDP coming from this sector. Manufacturing and agriculture contribute 19.4% and 1.7% to the GDP respectively (Central Intelligence Agency).

Percentage Change in France’s Real GDP

Graph 1: Retrieved from IMF

Employment and Unemployment

Employment rate relates to the proportion of the labor force with jobs whereas unemployment is that part of the workforce without jobs. These are important economic indicators used by economists and other individuals to comprehend the condition of the economy (Hubbard and O'Brien 56). Unemployment in France is declining more slowly than the top European economies. This scenario is attributed to a gradual recovery in employment creation and economic growth that is offset by the number of youths entering the job market every year.  In 2016, the unemployment rate in France fell below 10% since the year 2012. Statistics shows that the unemployment rate of France and its overseas regions fell to 9.7% in 2016 compared to 10.1% in 2015 (International Monetary Fund).

Unemployment rate in France compared with its peers in 2015

Graph 2: Retrieved from http://web.a.ebscohost.com/ehost

Employment rate in France in 2015 compared with its peers

Graph 3: Retrieved from IMF

Inflation

Inflation denotes a persistent increase in the prices of services and goods within an economy. Inflation usually raises the costs of doing business by increasing the expenses of the firm such as the cost of raw material, rent, and other utilities. Inflation is often desirable when it is relatively low and stable (McTaggart, Findlay and Parkin 59). Like any other nation, France experiences variations in the rate of inflation from time to time. However, in this nation, the rate of change in inflation is quite small. For example, in 2015 and 2016, the percentage changes in average consumer prices were 0.1% and 0.3% respectively (Baum 56).

Business Cycle Positioning

Business cycle entails variation in the economic activity of an economy over a period. Recessions and Expansions typically characterize an economic cycle. During the recession, the economy contracts, characterized by a decrease in employment, personal incomes, industrial production, and sales. On the other hand, expansion signifies the economy is increasing in real terms as evidenced by an increase in sales, employment, industrial production and other economic development indicators (Bhattarai 180). Growth is often considered from the trough of the past business cycle to the peak of the present cycle whereas as the recession is gauged from the peak to the trough. When weighed against to its peers, the French economy tolerated the economic downturn of 2009 fairly well. The root of this trend can be attributed to consistent consumer consumption rates and little dependence on cross-border trade at that particular time (Facchini and Melki 1410). Though, this great depression of 2009 resulted in a considerable decline in the French economy. Since then, economic growth has been recovering slowly.

Macroeconomic Policies

Monetary Policy and Financial Indicators

The central bank of France is charged with the responsibility of implementing the monetary policy. France follows the conventional monetary instrument of the Eurozone as provided by the European Central Bank (ECB) (De Santis 550). The primary purpose of EBC’s monetary policy is to uphold price stability among the European countries. Therefore, interest rate implemented by the Banque de France is determined by ECB. Like other European countries, the central bank of France is committed to ensuring that the inflation in the country is below but near to 2%. This bank utilizes the benchmark refinancing rate and deposit rate policies to achieve desirable rates of inflation (Morselli 95). With a relatively small level of inflation in the French economy, it is evident the Banque de France is committed to achieving a more stable economy favorable for business transactions.

Fiscal Policy and Public Finances

The application of fiscal policies by the government of France is mainly meant to stimulate the economic growth rate. In the recent years, France and other European countries have encountered a rise in public debt accumulation an aspect that necessitates the use of fiscal instruments. The France government uses both the government expenditure and taxation policies. For instance, the taxes have been increased and budget reduced in the recent years (Jaoul-Grammare and Terraz 430). These measures are projected to deal with the budget deficit of the country as well as boost economic expansion and development.

External Sector

Trade

France exports a wide variety of goods and services within and outside Europe. Some of the most valuable goods exported by France include aircraft and spacecraft, machinery, electronic equipment, vehicles and pharmaceutical products (Lebe 50). Moreover, the French economy is one of the globe’s largest exporters of agricultural and farm products, and it is well-known for its cheeses, spirits, and wine. The farm subsidies offered by the government explain why this country exports a significant amount of agricultural produce. When it comes to services, tourism is a vital sector. With at least 84 million overseas tourists every year, France is the most toured nation in the globe. Apart from exporting, France also imports commodities from other countries. The goods exported by this country include machinery, crude oil, aircraft, vehicles and among others (Haines 30). Travel and transportation are the most imported services.

Balance of Payment

The balance of payment entails a statistical account that assembles and categorizes all the financial and economic transactions of a country with the entire the globe over a specified time (Hubbard and O'Brien 65). Like many other nations in the world, France is experiencing balance of payment deficit. In 2013, the exports dropped less rapidly than the imports causing the trade deficit to shrink to lowest level compared to the previous years. In 2015 and 2016, France reported current account balance deficit of 4.832 billion and 11.52 billion U.S dollars respectively (Central Intelligence Agency).  The foreign direct investments also sway the capital inflows in France. The country is the destination of many foreign direct investments. Countries such as Germany and Italy have a lot of investments in France.

Exchange Rate Performance and Competitiveness

France uses euro as its currency, and thus its exchange rate policy is influenced by the European Central Bank (ECB). The Eurozone members have a flexible exchange rate controlled by the forces of supply and demand (Baum 70). Euro is also a reserve currency in the world. A reserve currency denotes that currency that is kept by the central banks and other major financial organizations for the purpose of influencing domestic exchange rate or for paying international debts (Hayes 48). Such currencies are often known as safe-haven or hard currencies. By using euro as its currency, France has some benefits. For example, this country faces a minimal exchange rate risk since when it purchases products from other nations.

Institutional Framework

Law and Enforcement

France is a democratic state with executive, judiciary, and legislature as separate branches of the government. The constitution of France provides for the separation of power among the three arms of the government.  Therefore, these three branches are required to be independent to limit and balance the powers of the government.  Executive authority is held by the president who is chosen by the citizens for a five-year term (Dicey and Allison 37). The president selects a prime minister who acts as the head of the government. The legislative power is vested in the senate and the national assembly. The parliament is responsible for making laws and approves the budget. The judiciary system of this nation is complex and unique with many hierarchical courts. The court reviews the laws passed by the legislature. The independence of France’s judiciary is founded on a civil law system.

Labor Market

Understanding the nature of a workforce of a given country is vital to the international investors when deciding where to locate their businesses. Since the Great Depression of 2009, unemployment has remained an issue in France. It was until 2016 that the unemployment rate fell below 10% since 2012 (LEMIEUX 34). Moreover, the service sector is a major contributor to France’s labor force. This sector contributes approximately 75.7% of the workforce. Industry and agricultural sectors represent 21.3% and 3% of the workforce respectively (Central Intelligence Agency). Another important feature about Frances labor industry is government regulation. This country has laws concerning minimum wages, minimum working hours and is also considered to have one of the stringent rules on employee dismissal. These laws change from year to year hence it is important for the employers and organizations to remain informed. For example, the minimum wage per hour stood at 9.61 and 9.67 Euros per hour in 2015 and 2016 respectively (Despax, Rojot and Laborde 80).

Competition Policy

The antitrust and competition law in France is tied to the European Union Model and regulations concerning unfair competition, abuse of power, dominant firms, acquisitions and company mergers.  The companies operating within French economy are required to adhere to the principles of good business practices to avoid facing penalties. In France, the competition authority is charged with the reasonability of guaranteeing appropriate market competitiveness and ensuring that the consumers are exposed to best prices (Guidi 50). The authority, therefore, evaluates anti-competitive conducts and can choose to impose fines, sanctions or induce the firm to change its bad practices.

The firms are prohibited from discriminating in business relations or erecting irrational commercial conditions. The prices must fair so that other companies are restricted from entering the market. In the case of price fixing, fines are applicable. Moreover, the costs of production, marketing, and processing must be set according to the requirements of competitive prices.

Tax Policy

The taxes paid in France are determined and sanctioned by the parliament. The legislators approve the types of taxes and their corresponding tax rates. The taxes are paid to the central government, social security association, and the local governments (Santis and Surico 430). This country has a variety of taxes such as taxes on importation and productions, value added taxes, stamp acts, wealth taxes and the income taxes. The businesses operating in this economy should be aware of changes in tax policy that are likely to affect their operation especially the income taxes. In France, the income taxes include income tax on persons, corporate tax for companies and social contributions. The current corporate tax rate is 33.30%, and changes have been introduced to reduce it to 28% by the year 2020 (Haines 30).

Furthermore, France has various tax incentives meant to boost and encourage investments in the country. For example, the R&D tax credit. This tax incentive is implemented by the government to support the companies investing in research and development activities (Baum 61). As a result, the companies benefiting from the R&D tax credit are in a position to reduce their costs significantly. There are also other temporary tax exemptions as well as competitiveness and employment tax incentives for the business.

Trade Policy

France is an affiliate of European Union (EU) and adheres to a trade policy provided by the European Union Commission. The EU country members have a standard tariff rate imposed to their overseas trading partners. France and other EU state countries have several regional and bilateral trade treaties and are members of the World Trade Organization (WTO) (Hayes 51). Although France has a moderately open economy, it has some trade barriers. In Eurozone, agricultural are significantly protected through various measures such as subsidies. Moreover, the French economy attracts a significant amount of foreign direct investments, and the investment policies are usually transparent.  

Political stability

The political environment is a major factor investor consider before deciding which nation they will establish their investments. Businesses thrive in a country that is politically stable. The political process of a country assumes different forms ranging from dictatorship to participatory democracies. When dictators rule a country, then such countries are usually considered politically unstable as the chances of coups and riots taking place are higher. On the other hand, democratic governments are known to embrace the rule of law thus have minimal political risks (Facchini and Melki 1409). Although France is experiencing some political tension among the political parties, the country is democratic and hence political stable.

Strengths

France is among the top ten leading economies in the world with relatively stable GDP, a clear indication that the country has a wider market for its product. France has approximately 66 million inhabitants and has the second largest market in Eurozone.  France draws a significant amount of foreign direct investments, and the investment policies are transparent.  The country’s currency is a reserve currency, and therefore it has a minimal exchange rate risk brought by international transactions. The separation of powers among the three branches of government ensures the independence of the judiciary which is vital for handling possible disputes that might result from business dealing and contracts. The country is also politically stable thus a conducive environment for businesses, and there is a scheme in place to reduce the corporate tax from 33.30% to 28% by the year 2020. Additionally, the competition policy is instrumental in providing a fair ground for operations of the firms.

Weaknesses

Some of the problems facing the French economy are tied to the Great Depression of 2009. Since then, the economy has been recovering slowly a situation that has resulted in weak job creation. With a high number of youths entering the job market every, the unemployment has remained relatively high compared to other top European economies. Since 2012, the unemployment rate has been at least 10% and only fell to 9.7% in 2016. France is also experiencing a budget deficit a scenario that has forced the government to resort to a tax increase and reduction in public expenditure. Moreover, the minimum wage legislation increases the labor costs, especially for small enterprises. High job protection afforded to the employees in France makes it difficult for companies to eliminate unproductive employees.

Recommendation

Based on the assessment of the strengths and weaknesses of the French economy, we recommend that France is the best country for IEKEA to situate its new manufacturing facility. Despite the few shortcomings, the country has sufficient opportunities to make this company flourish. It is the most toured nation in the world, has transparent investment regulations, a wider market, politically stable and competitive currency.

Conclusion

The French economy provides a favorable environment for the flourishing of multinational companies. It is among the top ten biggest economies in the world and draws many international investors. The country has a stable political environment, stable and independent institutions and experiences relatively low inflation.

References

Baum, Warren C. French economy and the state. Princeton, N.J: Princeton University Press, 2015.

Bhattarai, Keshab. "Financial Deepening and Economic Growth in Advanced and Emerging Economies." Review of Development Economics (2015): 178-195.

Central Intelligence Agency. The World FactBook. 31 Dec 2016. 7 April 2017 <https://www.cia.gov/library/publications/resources/the-world-factbook/geos/print_fr.html>.

De Santis, Roberto A. "Heterogeneity, monetary policy and banks’ balance sheets: evidence from Euro area countries." Applied Economics Letters (2015): 549-557.

Despax, Michel, Jacques Rojot and Jean-Pierre Laborde. Labour law in France. Alphen aan den Rijn, The Netherlands : Kluwer Law International, 2011.

Dicey, Albert Venn and J W F Allison. Comparative constitutionalism. New York, NY : Oxford Univ. Press, 2013.

FACCHINI, FRANÇOIS and MICKAEL MELKI. "POLITICAL IDEOLOGY AND ECONOMIC GROWTH: EVIDENCE FROM THE FRENCH DEMOCRACY." Economic Inquiry (2014): 1408-1426.

Frank, Robert H and Ben S Bernanke. Principles of macroeconomics. New York, N.Y: McGraw-Hill Irwin, 2011.

Guidi, Mattia. Competition policy enforcement in EU member states : what is independence for? London : Palgrave Macmillan, 2016.

Haines, Anjana. "France urged to make bigger corporate tax cuts." International Tax Review (2017): 30-30.

Hayes, J P. Making Trade Policy in the European Community. New York, NY : Palgrave Macmillan, 2016.

Hubbard, R Glenn and Anthony Patrick O'Brien. Macroeconomics. Boston ; Montreal : Pearson, 2013.

International Monetary Fund. GDP of France. 12 July 2016. 7 April 2017 <http://www.imf.org/external/ns/search.aspx?NewQuery=GDP+of+france&submit>.

Jaoul-Grammare, Magali and Isabelle Terraz. "A Causality Analysis of Economic Growth and Union Density in European Countries." LABOUR: Review of Labour Economics & Industrial Relations (2013): 421-442.

Lebe, Fuat. "Financial Development and Economic Growth in European Countries: Bootstrap Causality Analysis." Journal of Global Analysis (2016): 47-70.

LEMIEUX, PIERRE. "FRANCE: THE END OF THE ROAD, AGAIN? ." Regulation (2016): 34-41.

McTaggart, Douglas, Christopher C Findlay and Michael Parkin. Economics. Frenchs Forest, N.S.W: Pearson, 2015.

Morselli, Alessandro. "The European Monetary Union and Strategic Approaches to Fiscal Policy." Journal of International Economics (2013): 90-98.

Santis, Roberto A. and Paolo Surico. "Bank lending and monetary transmission in the euro area." Economic Policy (2013): 423-457.

Sloman, John, Alison Wride and Dean Garratt. Economics. 9th. Harlow : Pearson, 2015.

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