Authors: Clarice Lim Hui Wen & (Uday) Sasthaa Gingee Bab
Region Head: (Uday) Sasthaa Gingee Babu
Editor: Sakshi Sanganeria
Illustration by Cham Reikia
In this paper, we will be taking a look at the recently announced French stimulus package and analysing its possible effects. The paper will look at how the package is being utilised to make the economy more environmentally sustainable and how it aims to revitalise the industrial activity which has taken a big hit during COVID-19 times.
Towards the end, we will be looking at an industry which the package fails to aid and how the economy will be moving forward with or without this package.
1. France’s economic outlook and vision
France has entered its worst recession since World War II, and is predicted to face an 11% decline in GDP for 2020 (Wires, 2020). In early September, France unveiled a €100 billion stimulus package to cushion the impact of Covid-19 on its economy (Thomas, 2020).
France currently faces chronic unemployment, which was exacerbated by the city’s lockdown- putting 31.7% of its working population out of work (Manceaux, 2020). France’s goal is to create at least 160,000 jobs by 2021, by incentivising firms to hire apprentices and those under the age of 25, through a slew of rebates (Hird, 2020). The government has decided that the coronavirus crisis is a golden opportunity to steer the economy towards a 2050 where France has achieved complete carbon neutrality! (Henley, 2020)
France’s Prime Minister, Jean Castex, conveyed his hope that the economy will return to its pre-pandemic levels by 2022 with the stimulus package. France reported a 13.8% fall in GDP in the second quarter, which was much lower than INSEE’s forecast of 17% and Factset’s prediction of 15.3% (Cambreleng, 2020). Given that France’s decline in output in the second quarter was not as severe as predicted, it is highly plausible that the economy will see a slow but steady recovery starting from the third quarter of 2020 (the period when France reopened its borders for international travel after a stringent two month lockdown) and could potentially return to its pre-pandemic levels by early 2022!
2. The Stimulus Package
In an effort to make France more environmentally-friendly, a large bulk of the stimulus will be allocated to green energy and transportation industries. This will generate jobs and increase competitiveness of climate-friendly firms- by ensuring that they are not disadvantaged by higher costs incurred from engaging in more climate-friendly practices (as compared to pollution intensive firms). Keeping in line with the Paris Agreement adopted in 2015 (European Commission, 2020) which aims to reduce the European Union’s greenhouse emissions by 40%, approximately €30 billion will be used on France’s greening policies, of which €6 billion is slated for improving energy efficiency in public infrastructures and private homes, and €2 billion will be invested in the hydrogen industry (International Institute for Sustainable Development).
The green stimulus stipulates that if firms fail to use their share of the funds to adopt more environmentally-friendly production methods, the funds will be redistributed into other areas of the economy.
As a result, businesses in great need of financial aid from the government have voiced out concerns over the attachment of climate-friendly terms to the government aid. These businesses are expressing concerns that the government’s priority about green initiatives is overshadowing the pressing need to attain financial stability. Focus on these green initiatives has added an additional burden on these struggling businesses during this pandemic.
It is, thus, imperative that the government demonstrates strong, long-term support for businesses by implementing measures such as the provision of tax reliefs for engaging in greener methods of production and investments into clean energy R&D.
The First Focus - Greener Economy
€30 billion has been allocated to transition France into a greener economy.
The green stimulus is largely focused on ‘greening’ the transport and energy industries through a multitude of measures such as renovating buildings to make them more energy-efficient, boosting investments in climate-friendly industries and promoting the use of electric bikes to accelerate decarbonisation of France. The transport industry will receive €11 billion, of which €5 billion will be invested to boost France’s rail network to shift freight traffic from road to rail, greatly reducing carbon emissions. Approximately €9 billion will be invested to shift France’s reliance on nuclear energy and fossil fuels to green energy.
France aims to wean off nuclear energy and fossil fuels by developing hydrogen technology. In 2018, France launched the “Hydrogen Plan” which outlined their goal to develop hydrogen as a sustainable energy source for use in many industries, in particular the transport industry. As such, France’s current plans to increase reliance on green energy will see them working on the pre-existing “Hydrogen Plan” (Radowitz, 2020). Currently, 75 % of France’s electricity is reliant on nuclear power. President Macron plans to cease operations of 14 of the country’s 58 nuclear power plants by 2035, and tap on hydrogen energy as an energy source instead. The reduction in carbon dioxide emissions improves the air quality and citizens’ health, thus increasing their non-material standard of living. There will be an increase in job opportunities in the booming hydrogen industry as more firms turn to it as an energy source. It is expected to provide employment for up to 150,000 people by 2050 (Franke, 2020).
In the long run, this will increase consumer income and hence expenditure, stimulating a rise in real GDP. It is now crucial that the government equips its citizens with the necessary skills and knowledge and helps them to adapt to the changing landscapes to increase their chances of being employed by these booming industries.
The Second focus - Investment into industries
This stimulus is a new approach as France had always tried to stimulate demand by increasing direct payments to households.
Germany, who also announced a stimulus package in June 2020, is actually employing the old approach- where they will directly increase income of the households.
France is not employing this approach as when they did this in the past, they noticed that although consumers had increased incomes, they did not have anything to spend it on as they did not focus too much on revitalising the industries who were also affected by the crises.
Today, Macron is focusing more on the industries. This approach would see more positive results than the former because French consumers built up savings during the lockdown and incomes were broadly preserved (Economist, 2020). So now, the government feels that consumption will automatically take off, once the consumers feel confident about the state of the industries.
To do this, the stimulus package will be used in many ways:
Around €30bn euros is going towards providing tax cuts and incentives for businesses. The tax cuts are something that Macron wanted to focus on for quite a while because French companies have to pay hefty levies according to the value added in their production on top of heavy social charges and corporation tax. He has not been able to do so because of the strict EU fiscal rules. After Covid-19, however, the EU eased up on its rules and now Macron has the fiscal space to provide the companies some tax relief (FT, 2020).
One major feature of this package is that it will be used in the maintenance of France’s furlough scheme. The furlough scheme is a government scheme that pays a percentage of the wages of employees whose employment has been affected due to some medical reasons. The scheme also applies to people who cannot work because of Covid related office closures. Muriel Pénicaud, the labour minister, said ‘At the end of April, 8.6m employees are benefiting from the scheme’ (Mallet, 2020). This number is only expected to rise in the future. The Minister also mentioned that 50,000 inspections would be conducted to ensure that the money is being properly utilised for its intended purpose. Given France’s current situation, extending this scheme, although heavy in cost in the short run, is definitely beneficial in the long run. It ensures that there won’t be a prominent loss in skill and human capital in the long run.
France will not just focus on making a greener economy, but a technologically advanced green economy with around €7bn going towards digital investments. The Stimulus plan will help investments in tech startups, infrastructure digitisation and more digital transformation with a focus on investments in cybersecurity, quantum computing and green tech (Dillet, 2020). The plan does not forget the citizens- as €360M will also be going to educate the citizens, so that they can be well qualified in an increasingly digital world. The French government has made this plan clear to the emerging firms and so the results should be seen almost immediately.
€15bn euros will be going to the aerospace industry to support manufacturers such as Airbus and the national carrier, Air France. The firms must increase investment in alternative technologies as a result of the green economy initiative eg. electric/hydrogen planes. This deal would help Airbus to remain competitive alongside its rivals ( Boeing and Comac) which have threatened the duopoly. This bailout will enable Air France to order new Airbus planes & the package also includes the government’s defence spending on Airbus military products. France’s 7 billion-euro bailout for Air France-KLM comes with terms which require the airline to eliminate short-haul flights for routes covered by high-speed trains so that it will help reduce the carbon footprints from the planes and help the trains increase their returns.
3. What’s going to happen and some problems
With a stimulus of this massive size, certainly some effects can be seen almost immediately.
Bruno Le Maire, French Finance Minister, said that they expect an ‘8% growth for the year 2021’. France is poised to be in a much better state than most of its neighboring countries.
However, this plan should not be seen as a cure-all package. It fails to address some of the major problems the country is facing as a result of COVID-19.
An example of a heavily hit industry would be arts and culture. Artists all over France have been affected by the shutdown of theatre houses and other entertainment venues and it doesn’t seem like the government is currently prioritizing their revitalization which is something that can have a trickle down effect on all the other industries. The arts and culture sector contributed € 91.4 billion (in 2017) to total revenue and its benefit is equivalent to 2.3% of GDP, a weight comparable to that of the food industry and 1, 9 times greater than that of the automotive industry. So, if the country does not focus on its arts and culture France might be seeing a major hindrance to its development.
It will be interesting to see what the next ten years hold for France- complete with all the renovation and refurbishment of its economy.
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