France and the Euro

The Real Reason for the Riots

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, Germany's 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...

>> Click here for World Price Index Data for December Used in this Release

Notes to Editors
  • The World Price Index is based on original data collected by World Economics.
  • The World Price Index is released during the 2nd working week of each month.
  • Latest month market exchange rates are calculated at the time of data collection.

About The World Price Index

The World Price Index is calculated monthly from a basket of internationally comparable goods and services. It is designed to alleviate the horrendous problems associated with analysing economic or market data using currency market exchange rates.

Exchange rates vary with extraordinary rapidity, frequently with little obvious link to economic reality, but fatally distorting the perception of value in markets and economies. It is vital when analysing international data, whether for market analysis purposes, or to allocate resources across the globe, to review data using an international yardstick of value. This can only be done using Puchasing Power Parities (PPP), which make allowance for the purchasing power of currencies within individual countries to make comparisons based on a standard currency, usually "international dollars".

There are various sources of PPP data, but most are of only academic interest as they are years out of date. The World Price Index is the only available index updated monthly to provide an easy way of reviewing trends or relative values of market or economic data in realistic terms.

About World Economics
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