Macro-Economic Policies - Essay Example

The controversial face off between Segolene Royal and Nicolas Sarkozky in France's upcoming elections elicits memories of the economic issues and difficulties the country confronts. For one, the country's economic stability is dependent on the government's macro-economic policies, and expectations on the candidates are very high. The French and member countries of the European Union expect that a leader, who can provide solutions to the pressing problems that beset the country, ranging from the rising unemployment, fiscal deficit, law and order, social unrest, to the future direction of the European Union, will eventually emerge. At the heart of this conflict is not only the politics of Royal and Sarkozky, or the pitting of ideals of the Socialists against the Rightists, but also the more crucial macroeconomic issues the country face, the extent of the government's efforts to provide solutions to these quandaries and the future political and economic stability of the country. It is therefore, crucial to understand the major macroeconomic issues which plague France as a nation and evaluate the actions and the success the government has taken in order to achieve economic stability. One of the key issues, which challenge the nation in recent decades, is the high rate of unemployment. The French government in the past has taken diverse approach and initiatives to spur growth and employment. However, the approach was not feasible to provide solutions to the problem of rising unemployment rate (OECD, 2007). The OECD has encouraged the French government to bring forward measures that could advance structural changes in the economy. The organisation has identified three main problems the government need to recognise: a) guarantee medium-term financial viability and develop the tax system structure to augment benefits and minimize expenditure, b) raise employment rate among low-skilled workers and focus on particular groups through the restructuring of the labour market institution, c) improve the possibility of growth and jobs creation through further economic reforms which in turn encourage competition (OECD 2007). In addition, the current French policy and procedures for the firing of workers especially permanent labourers are more intricate compared to the dismissal of temporary workers. If a firm wants to dismiss a permanent worker, it has to provide legal justifications which are too rigorous to follow. Thus, redundant workers become a burden and liability of the company as the firms themselves are obliged to help dismissed workers find employment (OECD 2007). This hinders the majority of companies in France to provide permanent contracts to their employees, adversely affecting the job prospects of the youth and the unskilled. In the recent years, the government has come up with a solution by introducing a special contract called the "Contrats Nouvelles Embauches" which gives companies - those which do not have more than 20 workers - the flexibility to terminate the contract in the span of two years. However, the contract requires firms to disburse high severance payments (OECD 2007). Another economic dilemma France struggle to hurdle is the public sector deficit. Although the government has been successful in curbing deficit in the past couple of years, France is not ready for the long-term effects of indiscreet expenditures on health and pension resulting from the ageing of the population. Hence, despite the significant reforms the government has already achieved, OECD recommends that the ratio of public debt to GDP be reduced. GDP or Gross Domestic Products refers to the value of all the goods and services produced within a state or a country in a particular period of time. This is also the sum of consumption, investments as well as other various elements such as government's expenditure and export/output. France's GDP gap widened over the year as compared to government expenditure but GDP growth has becoming stronger over the years moving from 1 percent a year from the year 2000 to about 2 percent in the current year. The French Central Bank regulates and sets the interests rates. In the last couple of years, the French government has successfully initiated programs and policies to reduce government spending. In 2006, for instance, the government introduced reforms on the health care insurance schemes in order to generate savings - part of the governments long-term solution to the problem. The government likewise started implementation of hospital system reform which aims to manage public spending and increase efficacy. However, progress on this scheme has turned out to be slower than expected. Authorities also plan to reduce public sector employment to control spending as well as focus instead on efficient service, but this has not been realized yet as policymakers failed to introduce a workable system to reduce employment (Hj , J., & Wise, M, 2006). Aside from the setbacks brought about by public sector deficit and high unemployment rate, France also suffers from taxation problems. Experts at OECD contend that crucial reforms in the entire taxation system must be brought forth. Currently, France utilizes various institutions which 'calculate, collect and allocate 'tax revenues. These institutions incur high administrative costs although the government, in the last decade, tried to reduce these costs which in turn place more burden on taxpayers as they have to shoulder the administrative costs. The long term solution seen by OECD experts on this is to merge social security funds and personal income tax to significantly lessen expenses and increase savings. The trimming down of tax expenses will also result to savings in cost of tax administration and more pronounced transparency of the taxation system (Hj , J., & Wise, M 2006). Tax credit measures and deductions for firms and companies, which exhibit benefit and apparent advantages to society, must be initiated. According to studies done by the Economist Intelligence Unit and OECD, the national corporate tax and local taxe professionelle, a national government subsidized burden of local firms, should be significantly reduced and possibly eliminate totally and instead, bestow tax breaks to entrepreneurial activities which could spur economic progress (EIU Country Data, 2007) (OECD 2007). The current method of taxation in France allows the state government to reimburse domestic taxes on behalf of companies. In the past decades, France started to lag behind the powerful countries of Europe, which it used to parallel in terms of economy and competitive ability. Although currently, the country has caught up with global competitiveness in business and economics, France still has to face policy concerns, which hinder the evolution of efficient competition. Competitive constraints in various sectors are particularly feeble especially in the service sector of the economy the government puts under its protection. These constrictions on competition lessen productivity and progress and thwart the creation of employment as various sectors in the French economy are apparently sheltered and regulated. The government has done little to remove superfluous protection in the professional service sector. For some economic experts, the absence of competition in French retail firms diminishes the economy's prospects for growth and innovation. Hence, the government must introduce further reforms, which afford greater importance to the welfare of the consumers rather than to the a few special interest groups who, more often generate more noise than the disadvantaged individuals from different sectors of the French society. However, the incumbent government asserts that the regulation of retail prices has been altered in order to lower the prices of retail goods. This policy, for some, is more confounding than the previous one. In addition the government has also made strides in the execution of EU directives applied to the electricity sector (Gufinkel 2002). Problems still arise as consumer welfare should be the principal considerations of competition and regulatory reform policy but the present administration continues to allow special-interest groups to verge and control the course of the economy. Authorities likewise failed to abolish the legal and policy constraints on selling below costs. OECD contends that this thwarts price competition in the retail market, which in turn creates barriers to more competitive market entities (Gurfinkel, 2000). These macroeconomic issues will plague France in the future if the government fails to implement necessary policies. The upcoming election is a great chance for the country to effect changes in the economy. Apparently, the nation has a choice to consider the economic platforms of the candidates as the future of France's economy is clearly at stake. So far, not one of the two candidates, Ms. Royal and Mr. Sarkozy, has clear plans on how to fix the economic quagmire the nation is dealing with. (economist 1) Far from just criticizing France's 'unsustainable level' of debt which amounts to 65% of the GDP, Ms. Royal brought forth a protracted sequence of commitments with regards expenditures and how she will 'streamline the bureaucracy' if ever she wins (EIU). In addition, Royal plans to impose tax on capital instead of on work and redistribute wealth, except that she fails to specify how she plans to implement most of these . On the other hand, Sarkozy, France's current Interior Minister, plans to implement a more lenient measures on France's restrictive labour market. The Economist Intelligence Unit (EIU) predicts that the direction of France's economy greatly depends on the results of the elections. Sarkozy's victory will bring about reforms in the labour market as well as tax cuts, while Royal's victory is predicted to result to higher taxes, higher costs to businesses and companies and the renationalisation of major energy utility companies. However, economic problems will continue to plague the country whoever wins the elections as both of the candidates are expected to oppose the reforms EU is pushing forward: the reduction of government subsidy on French farmers. Still, EIU states that the government has done part of its job in 2006 as France enjoyed modest economic recovery in 2006 but GDP is forecasted to slow down from 2% in 2006 to only 1.8% this year and only a modest growth in GDP is expected in 2008. In addition, France is expected to incur large trade deficits in 2007 and 2008, which will be manageable as these will be offset by surplus contributed by the service sector of the economy and the increase in investment income accounts (EIU 2007). On the surface, it seems that France is headed for a great economic future as one listens to the rhetorics of the candidates. However, Tim Smith author of the book France In Crisis (Smith 2004) asserts that the French leaders have been blaming the wrong culprits for France's economic ills. Smith contends that the politician's refusal to abolish the welfare state contribute to economic ills and social inequality that inundates the country as the French system of welfare bestow benefits the rich and the protected and to those who need the least in the society. This seems to show that France is still headed for economic limbo. SOURCES OECD, (2007). COUNTRY NOTES: ECONOMIC POLICY REFORMS. Organisation for Economic Co-operation and Development Publications. Hj , J., & Wise, M (2006). PRODUCT MARKET COMPETITION AND ECONOMIC PERFORMANCE IN FRANCE.OECD Publications. Economist Intelligence Unit, (2007).Economic data. Country Data. The Economist Magazine Gurfinkel, M. (2000). Case study: France and the new economy. Valeurs Actuelles, Paris: OECD. OECD, (2005). Economic Survey of France 2005. OECD Country Data, The Economist Magazine, (2007). The lady in red. The Economist Magazine, 15 February, 12. The Economist Magazine, (2007). Taking a left turn. The Economist Magazine, 12 February 2007, OECD , (2005). Economic Survey of France 2005 :Making the fiscal system sustainable and more efficient. OECD Publications. Smith, T. (2004). France in Crisis:Welfare, Inequality, and Globalization since 1980. Queen's University, Ontario: Queen's University. Read More