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3 Huge Problems With France's Economy

By Justin Loiseau – Feb 1, 2014 at 8:00AM

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France’s economy is in a funk -- here are three reasons why.

Paris is the city of lights and France is the land of love. But lights and love don't make money, and France's economy has hit increasingly hard times in the past few years. Here's why.

1. Not-so-unified European Union

Source: Flickr, Motiqua. European Union Parliament Headquarters in Brussels, Belgium. .

The European Union began as a steel and coal agreement in the 1950s -- and perhaps it should've stayed that way. Despite aspirations of economic prosperity, cultural preservation, and never-before-seen international synergy, the European Union has lately been more headache than help.

For an economically strong country like Germany, the European Union has been a thorn in its side. And for nations with weaker economies like France, Greece, and Italy, the Union isn't helping, either.

Germany's strength keeps the euro pricier than France prefers, which hurts export opportunities. In its latest Eurozone manufacturing report earlier in January, Markit Chief Economist Chris Williamson noted:

France is seeing a steepening downturn, in part the result of widening export losses. This suggests that competitiveness is a key issue which the French manufacturing sector needs to address to catch up with its peers.

Slower exports mean slower business, which in turn affects all aspects of France's economy. Although the French still lay claim to the second-largest economy in the Eurozone, manufacturing hit a six-month low in December. The country's unemployment rate has hovered around 10.8% over the last year, more than twice as high as Germany's.

2. Regulation

Source: Wikimedia Commons, Garitan. France President Francois Hollande of the Socialist Party.

Despite its history of revolutions filled with cries for freedom, French love regulation. The country thrives on controlled chaos, and rules are a must for a society that flourishes on bending them. Regulation comes part and parcel with EU membership, and France's own regulation tops most.

The nation's goals are laudable: environmental protection, high health and safety standards, support for local businesses, and social safety nets for marginalized citizens. But President Francois Hollande of the Socialist Party may be taking things too far.

His wealth redistribution plans include a "millionaire tax" which tacks a 75% levy on salaries exceeding 1 million euros -- a move that has been met with ferocious backlash by everyone from movie megastar Gérard Depardieu to Xavier Niel, the so-called "Steve Jobs" of France .

But it's not just the millionaires getting mangled. A recent report looked at an artificial barrier to growth for small companies considering expanding beyond 50 workers. Since "a tsunami" of labor laws hit businesses when they hire their 50th employee, some choose to stay smaller to avoid forming work councils, increasing union representation, etc, according to the write-up by economists.

While that might mean better conditions for those with work, France's 90% union membership rate already takes care of most of its citizens. So instead, France's economy misses out on supporting small businesses, increasing employment, and improving productivity. The economists' rough estimation of lost opportunity clocks in at a whopping 4% to 5% of France's economy -- around $118 billion.

3. Culture Shock

Source: Wikimedia Commons, Raphael Goetter. Metro worker strikes leave commuters stranded in 2007.

The French are just as hardworking as others -- but their country has undergone significant change that puts many cultural traditions at odds with economic sustainability and prosperity.

When France introduced a 35-hour workweek limit in 2000, other countries regarded the decision with a mix of astonishment, disdain, and perhaps even jealousy. But what was made law by liberals hasn't had its intended effect -- instead of promoting more employment, the rule has mostly allowed workers in France's economy to claim overtime on their average 39.5 hours of work a week, according to 2011 numbers (most recent data).

But even with overtime, not everyone's happy to ubiquitously expand employment. The French are infamous for their "grèves," when workers strike by the thousands (or hundreds of thousands) to demand more work, better work, or better paid work. The practice periodically shuts down airports, trains, and public services of all sorts. It's such a common occurrence that Yahoo! Finance's French page has an entire section devoted entirely to the coverage of the latest grèves.

While employers may appreciate the joie de vivre that their French workers emulate, corporations are understandably hesitant to open up shop in a fickle-minded France.

The fallacy of France's economy
The French have made emotional economic decisions before. From guillotining its upper class to selling Louisiana to the U.S. for less than three cents per acre, the country has had a haywire history. The challenges it faces today are unlike any it's ever seen before, and it's going to take more than a glass of Burgundy to make these three problems disappear.

Fool contributor Justin Loiseau has no position in any stocks mentioned. The Motley Fool recommends Yahoo!. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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