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Global Business Context Assignment 2008 Part 1: France’s economic performance over the last 40 years can be illustrated using three main macroeconomic variables; unemployment, inflation and GDP. When comparing them against each other, we can explain the relationships between each variable. (A table of the variables can be found in the appendix. ) This graph shows that although there appears to be no direct relationship between GDP and unemployment until after around 1986, a correlation begins after this point.
As we would expect to see, GDP increases as the rate of unemployment falls and vice-versa. Unemployment has been increasing since 1970 and continued until around 1986, eventually peaking with very high rates of nearly 12% in 1994. When analysing the French GDP, it is evident that although it fluctuates, it does not follow a predictable pattern between 1970 and 1986; all three variables seem to be unstable until around this time. It is worth noting that the economy seems to perform better from the time Jacques Chirac became president in 1995, which may have been due to new economic policies.
Also, the substantial dip in GDP and sharp increase in inflation from the early 1970’s was probably attributable to the OPEC oil crisis of 1973 (and 1978) which would have affected both businesses and homes, resulting in less money to spend and less potential for output. (Zaleski, 1992) This graph reveals French inflation taking on a surprising path, moving in the opposite direction to changes in GDP which we would not normally expect to happen. This, alongside an analysis of the inflation and unemployment graph indicates that France experienced cost-push inflation from 1970 until around 1985.
As the costs of production rose due to the inflation mainly caused by the OPEC oil crisis (an example of import push inflation), unemployment increased as companies could not afford to pay workers and thus reduced their output. The effect of this can be further demonstrated by an aggregate demand and aggregate supply model, figure 1: The AS curve shows the amount of output that can be supplied at a price. When this shifts left, decreasing the supply of goods, the curve moves up along the AD curve, resulting in an increase in demand which allows for inflation to occur.
However, when cost-push inflation takes place, it cannot last as inflation results in less disposable income, eventually causing demand to fall. When this happens, as it did in France from 1986, the aggregate demand (AD) curve shifts left and down the aggregate supply (AS) curve so prices begin to fall. This lowers inflation and should also in theory have a positive effect on unemployment. During the period of cost-push-inflation, it is likely that France was experiencing demand deficient unemployment as consumer demand fell (Sloman 2005).
Although a type of equilibrium unemployment, French rates in 1986 were still very high compared with Germany (6. 6%), Austria (3. 3%) and Italy (8. 9%) . This can again be explained using simple AS and AD models of the goods and labour markets: The model shows that for any level of GDP (output) there is a corresponding level of employment because as demand for goods increases, so must the demand for labour to accommodate the required levels of supply. The inflation in France around this time was so high that it affected the unemployment rates substantially.
After this period, it could be argued that France began to experience frictional unemployment due to the strict labour laws. Although difficult to dismiss workers in France as we will soon discuss, companies had no choice during the times of cost-push inflation. However, due to the labour laws it is likely that after this period companies were not eager to take on new staff. Although jobs would have been available in France at this time, people could not obtain paid work and the country’s output, and therefore GDP, began to fall again once cost-push inflation had ended.
Part 2: “In a world which is changing very fast, France is lagging behind while it has exceptional assets. ” (Nicholas Sarkozy. January 2008. bbc. co. uk) To address these economic issues, new president Nicholas Sarkozy has proposed radical changes and on January 21st 2008, trade unions and employers’ organisations signed an agreement for a drastic reform of French labour law. The main policies he either has or will be introducing are as follows: •Capping individual direct tax rates to 50% from 1st January 2008, this excludes social security contributions. euro-zone. org) •Making any hours worked beyond the standard 35 hour week overtime which will be exempt from taxation and other contributions. (Telegraph. co. uk) •Tightening eligibility for unemployment benefits. (businessweek. com) •With half of all current civil servants set to retire over the next ten years, Sarkozy has pledged to replace only one of every two. (project-syndicate. org) •A law restricting transport strikes took effect on January 1st 2008. (project-syndicate. org)
This basic outline serves to illustrate Sarkozy implementing market oriented supply-side policy which seeks to shift the aggregate supply curve right (See figure 1; the curve would shift from AS2 to AS1). This is reminiscent of both Reagan and Thatcher who took the same approach to their respective economic states after the oil crisis. One aim of supply side policy is to reduce the level of government involvement, an aspect of this is the reduction of government spending which currently consumes 53. 7% of France’s economy. (Businessweek. om) Steps towards this include tightening eligibility for unemployment benefits and replacing only 50% of civil servants due to retire in the next ten years. This part of supply side policy leads to a more efficient use of resources within the public sector and simultaneously, a reduction in its size. It should allow for investment to increase with no shift in the aggregate demand curve, avoiding rises in inflation. (Sloman 2005) Tax cuts also feature heavily in supply-side policy and were a key component of the Thatcher and Major governments between 1979 and 1997.
Sarkozy has also proposed tax cuts, capping income tax at 50% for the highest earners. Twinned with making the 35 hour week more flexible by including tax free overtime in his policy, this reinforces Sarkozy’s slogan, ‘work more to earn more’. (bbc. co. uk) This may result in the substitution effect as people spend more time working and less time on leisure activities. How this will impact on the circular flow of income in the long run is uncertain as it is unpredictable whether the money will continue to circulate or the French will be inspired to save.
Sarkozy’s recently executed policy to reduce the power of labour by passing a law restricting strikes is also similar to Thatcher’s policies which included weakening the influence of unions, resulting in them losing political pressure. (Sloman 2005) France currently has one of the lowest levels of trade union membership in Europe at only 9% compared with Germany’s 27%, UK’s 29% and Italy’s 30%, yet it has one of the highest number of days lost to strike action. (FedEE. com) The two facts are directly connected as weak unions resort to strike action to influence government policy.
In using supply side policy, the effect of this can be lessened and Sarkozy can implement policy favouring the whole economy, not just unions. Cutting labour costs results in increased investment and rising profits, creating a business climate where the economy can grow. Sarkozy has also pledged to relax some of the labour laws currently hindering the labour market. It is currently very difficult to release staff as they can sue for wrongful dismissal up to 30 years after the event. Quitting is seen as a last resort as doing so results in complications in acquiring unemployment benefits. (LAtimes. om) New proposals are likened to Denmark’s “flexicurity” model which has been encouraged by the European Commission for some time to improve worker’s rights. The supply side policy regarding the labour market seeks to shift the aggregate supply of labour right by making it more worthwhile to work whilst also shifting the aggregate supply of labour right by relaxing the above laws, making it far easier for both employer and employee. In theory supply side policies lead to increased levels of GDP and employment and lower inflation, which alongside new employment laws, would be beneficial to firms setting up in France.
If Focus Plc decided to make a move in to France, they could enjoy the benefits of these new labour reforms. Hiring workers would be substantially easier, as would releasing them should there be a need. With extended trial hire periods proposed, the risk of taking on new staff would be reduced significantly. Also, once inflation lowers to a more acceptable level, Focus could operate at lower costs and eventually reach their own supply and demand equilibrium on a more microeconomic scale. Increased GDP would also be a positive for Focus as an increase in economic growth would result in more disposable income, leading to increased spending.
The home DIY market is a growth sector; the market has increased from ? 4. 9 billion to over ? 8 billion in 10 years so the likelihood that money would be spent in this market is high, especially as revamping your own home has become so popular in recent times. (diyweek. net) The German economy has also recently been through tax and labour market reforms under former Chancellor Gerhard Schroder and his successor Angela Merkel. Its economy grew by 2. 9% in 2006 and unemployment fell to 7. 7%, according to OECD estimates. (businessweek. om) If Germany’s performance is an indicator, a similar pattern may occur in France, which spells positive times for firms looking to set up shop there, such as Focus Plc. Part 3: So far, Sarkozy’s plans for reform have not been welcomed with open arms. There have been strikes and protests against preparations to increase the quota of taxis in France (see appendix). There is suspicion between trade unions and workers after the reforms were signed by the unions on 21st January, against worker’s wishes. (wsws. org) Hundreds of thousands of civil servants joined striking transport and energy workers in November over the reforms. bbc. co. uk). Although beneficial to the economy, the French public are seemingly opposed the changes and Sarkozy’s popularity is rapidly falling. His approval rating has declined to its lowest point in his nine months in office. (Reuters. com) This unrest would have made any recent attempt to set up shop in France very difficult and uncertainty is still prominent as Sarkozy is rumoured to not be implementing any further policy until after the upcoming regional elections. Looking to the future, there appears to be mass opinion suggesting that Sarkozy’s supply side policies alone will not restore stability to the French economy.
Dr David Howarth of Edinburgh University says, ‘since supply side reforms tend to suppress demand in the short run, I am in favour of a combined approach of supply and demand policies for France. ‘ (journal-online. co. uk) Economist David Milleker also states, ‘the resulting shift in the functional income distribution from wages to profits [in relation to lower income tax] is going to be a drag on growth. In order to mitigate those negative effects the government should try to stimulate demand by expansionary fiscal policies. ‘ (euro-area. org)
Using expansionary fiscal policy to influence the level of aggregate demand could stimulate the economy alongside supply-side policy as long as fiscal policy was used moderately as it can reduce some of the positive effects of supply side such as tax reductions and can also be subject to random shocks. In this way, predicting the effects of fiscal policy can be very unreliable and Sarkozy may not wish to consider this option if he is considering combining forces with George W Bush in Iran, as was announced in November (bbc. co. uk) as war can destabilise the government’s fiscal policy. Sloman 2005) As we discussed the German economy earlier, it is worth analysing their position in relation to France in light of the recent changes. While investment has picked up sharply in Germany, it has only risen slightly in France. This may be an indication that the French corporate sector is in an unfavourable position, perhaps because the French economy has lost price competitiveness. In conclusion, I would never advise a company to venture in to uncertain waters and in the current climate, it is unpredictable what policies may be implemented in France in the near future.
As mentioned, experts believe supply side policies alone will not rectify the problems the French economy is experiencing and it is unlikely that Nicholas Sarkozy will look towards introducing expansionary fiscal policy whilst looking towards joining Bush in Iran after concerns over the Iranian nuclear programme. To this end, my recommendation to Focus Plc would be to delay any planned move in to France until the economy has stabilised and geo-political issues have settled. References: Astier, H. 2007. What now for Nicolas Sarkozy? online]. [Accessed 5th March 2008] Available from World Wide Web: http://news. bbc. co. uk/1/hi/world/europe/6632711. stm Balmforth, R. 2008. Sarkozy’s popularity slumps further: French poll. [online]. [Accessed 5th March 2008] Available from World Wide Web: http://www. reuters. com/article/worldNews/idUSPAB00388020080219 Dullien, S. 2007. Is Sarkozy’s “fiscal shock” the right thing for France? [online]. [Accessed 5th March 2008] Available from World Wide Web: http://www. euro-area. org/blog/? p=80) Howarth, D. 2008.
Sarkozy’s French Revolution. [online]. [Accessed 5th March 2008] Available from World Wide Web: http://www. journal-online. co. uk/articles/show/2830 Matlack, C. 2007. Sarkozy Vows Reform: How Far Can He Go? [online]. [Accessed 5th March 2008] Available from World Wide Web: http://www. businessweek. com/globalbiz/content/may2007/gb20070507_834900. htm? chan=search Samuel, H. 2007. Sarkozy’s party heading for landslide victory. [online]. [Accessed 5th March 2008] Available from World Wide Web: http://www. telegraph. co. k/news/main. jhtml? xml=/news/2007/06/11/wfra111. xml Sloman, J. (2005). The Economic Environment of Business. Essex: Prentice Hall Wyplosz, C. 2008. France a la Sarkozy. [online]. [Accessed 5th March 2008] Available from World Wide Web: http://www. project-syndicate. org/commentary/wyplosz7 Zaleski, P. A. (1992). Industry Concentration and the Transmission of Cost-Push Inflation: Evidence from the 1974 OPEC Oil Crises. Journal of Economics. [Accessed 3rd March 2008] Bush and Sarkozy declare Iran aim. 2007. [online]. Accessed 5th March 2008] Available from World Wide Web: http://news. bbc. co. uk/1/hi/world/americas/7083339. stm DIY market worth ? 8bn. 2007. [online]. [Accessed 5th March 2008] Available from World Wide Web: http://www. diyweek. net/news/news. asp? id=10367 France gripped by massive strike. 2007. [online]. [Accessed 5th March 2008] Available from World Wide Web: http://news. bbc. co. uk/1/hi/world/europe/7102890. stm Trade unions across Europe. 2008. [online]. [Accessed 5th March 2008] Available from World Wide Web:http://www. fedee. com/tradeunions. html