Economic Data

WPI: France and the Euro - The Real Reason for the Riots?

World Economics - July 2019

President Macron finds himself between a rock and a hard place.

On the one hand, the French economy must somehow cope with an overvalued currency. The World Price Index measures purchasing power across different countries using the price of a globally sourced basket of goods. On this measure France has one of the most overvalued (and hence uncompetitive) currencies of the developed world (see chart below). Germany in contrast, has an undervalued currency in relation to the same basket of goods in Germany.

So German companies are in a very favourable position compared with their French rivals.

At the same time , France's Government debt has ballooned in value as a percentage of GDP since 2008, rising from a manageable 68% in 2008 , to a not so easy to manage and potentially dangerous level of 98% this year. In comparison, Germanys Government debt has remained stable, hardly moving over the same period from 65% to 64%.

Partly as a consequence of these two factors, German GDP in PPP terms has grown some 10% since the Great Recession of 2008, whereas the French economy has grown less than a quarter of this rate. 

The reforms already made by the Macron Government are aimed at improving the situation. But the static or in many cases declining standard of living experienced by the non elite French since 2008 are clearly causing frustration, as so vividly illustrated by the recent "yellow jacket" riots in Paris and elsewhere in France.

The "rock”, in the shape of the French currency interred inside the Euro, seems unlikely to move, as most Europeans, including the French, love the freedom conferred by the single currency, without understanding its potential for economic damage.

The "hard place”, in the shape of French debt, is unlikely to fall more than marginally in the near term, as the one thing the riots are likely produce is an increase in public spending.

It will be interesting to see how President Macron copes with these constraints on his movement over the coming months...