LONDON – France’s new president, François Hollande, has achieved a remarkable series of political victories – at home and in Europe – since his election in May. Unfortunately, his streak of success will inevitably call forth an economic reckoning that will shock France’s apparently unsuspecting citizens and doom the French elite’s approach to the “construction of Europe.”
Since winning the presidency, Hollande has won a parliamentary majority and pushed Germany toward accepting joint liability for eurozone countries’ debts. But forebodings of crisis have become widespread in French business and economic circles.
But the real danger – which even Hollande’s sternest critics may be underestimating – is not so much his individual policy failings (serious though they may be) as his approach to the twin challenges posed by France’s economic imbalances and the eurozone crisis. On each front separately, he might manage to muddle through; together, they look likely to cement France’s loss of competitiveness.
Declining competitiveness is best captured in a single indicator: unit labor costs, which measure the average cost of labor per unit of output. In a monetary union, discrepancies in wage growth relative to productivity gains – that is, unit labor costs – will result in a chronic accumulation of trade surpluses or deficits.