By Jeremy Becker
Britain and France, similar-sized countries with similar metrics have long enjoyed an economic rivalry. In the aftermath of the Second World War, a Keynesian economic consensus was established of American external stimulus, government-led demand management and nationalised industries. The three major economies of western Europe saw three distinct strategies. For Britain, the post war Attlee government transformed its economy and society by enlarging the state, nationalising a fifth of the economy and empowering the trade unions, creating a centrally-planned wage and price system based on negotiation. Britain, caught between an Atlanticist junior partnership with the USA and a global empire evolving into a Commonwealth, found itself locked out of an emerging European market. France enjoyed what it termed the “”30 Glorious Years” following a similar dirigiste system. The figure of Charles De Gaulle proved influential, leaving NATO, investing enormously in nuclear power and vetoing three British attempts to join what became a Franco-German economic pole. In West Germany, unburdened from military spending, Konrad Adenauer oversaw a Rhineland economic miracle, with weak trade unions and a dynamic market economy. The lowering of American tariffs created a huge export market for German manufacturing while the USA tolerated West German import restrictions and capital controls until 1958. Despite German dominance, both the UK and France enjoyed unprecedented growth rates until the late 1960s.
The Post-War economic boom and its Keynesian consensus saw itself run into a stagflation crisis in the 1970s brought about by the end of the gold standard in 1971. Deteriorating industrial relations due to runaway inflation then spiralled out of control when the 1973 OPEC crisis led to skyrocketing energy prices. Suddenly, the nationalised industries were inefficient and uncompetitive, and fiscal and monetary stimulus powerless to lift the growth rate. Britain fared the worst but the whole continent saw itself locked in a pattern of rising prices and stagnant growth.
The 1970s crisis brought about the advent of monetarism and “neoliberal” policy, in this case fiscal austerity, privatisation, price reform in the shape of weakened union power, the culling of subsidies and the tightening of interest rates. In Britain this came in the form of an eleven, year Thatcher government which, like Attlee before, fundamentally reshaped economy and society. This Friedmanite shock therapy cured inflation and delivered growth, restoring a society plagued by paralysing strikes but was not without a heavy cost. Moribund state enterprises were either left to dissolve or privatised often to foreign investors, as large parts of the country experienced severe deindustrialisation and its consequent negative social effects. Britain reinvented itself as a dynamic service-based economy centred around the financial services of the City of London, with specialisations in education, consultancy, banking and accountancy while its long history of manufacturing was abandoned. France, suffering less severely than Britain reached for less dramatic solutions, preferring to maintain a generous welfare state, a protectionist attitude to national industries and a rigid workers’ rights regime. President from 1981 Francois Mitterand abandoned his early socialist policies and from 1983 followed a similar policy of price reform: the ending of wage controls, business privatisation and the lowering of taxes but from the mid 1990s France changed course, with president Jacques Chirac denouncing the Thatcher-Major neoliberal agenda as “Anglo-saxon ultraliberalism”.
Both France and Britain have undergone similar trajectories over the last few decades. Both suffer major regional disparities and economic overcentralisation. According to 2021 OECD data, Paris contributed 31% to France’s GDP and London 24% to Britain’s. Britain’s service-based financialised model like France’s more reluctant one has undergone dramatic deindustrialisation, with both experiencing decline in manufacturing value added share of their economy from just over 25% in 1970 to around 10% today. Their paths now appear divergent however. In May 2022, the IMF warned that Britain faced the worst inflation shock of all major advanced economies over the next two years. In fact, in its latest report Britain is predicted to shrink in the coming year more than the war-mobilised and sanctions-besieged Russian economy. In contrast, the IMF forecast for France for 2023 is among the best in Europe.
France’s tighter regulatory regime, larger state and higher taxes saw it trail Britain on measures of GDP per capita for the first decade and a half of the 21st century. The 2008 crash proved a decisive turning point however as the heavily financialised Britain saw itself plunge into the deepest recession of any major economy. Britain’s bank losses in 2008 were 20.9% of GDP, more than three times the USA figure and ten times the EU average. In the wake of the crash, Government austerity across the G7 enabled the central banks to set low interest rates. The French took advantage of these building infrastructure and investing in the future while the British state found itself throttled by a byzantine planning system and a market distorted by the incentives of property speculation and short-term consumption. Policymakers scratched their heads over Britain’s comparative low productivity as the model of the pre-2008 boom years looked increasingly unsustainable. British debates over the economy often looked to the EU, culminating in the decision to leave in 2016. One branch of Leavers sought to undercut EU tax and regulatory environments and embrace unfettered free-trade, another to outmatch it in mercantilist intervention and labour supply restriction. The process of leaving proved to be cumbersome, requiring an expansion in bureaucracy rather than the hoped-for shrinking of the state, while its prolonged uncertain process has damaged investor confidence. This has left Britain currently in limbo, with many of the downsides of leaving while being unable to take advantage of its benefits.
The stagnant British economy, vulnerable to energy-price shocks and dependant on imports and foreign capital has completed a lost decade and looks about to enter another. Between 2007 and 2018 real median household disposable incomes adjusted for purchasing power fell by 2% in the UK while in the same period rising 34% in France, 27% in Germany and 23% in the Netherlands. Since 2015, UK GDP per capita has grown by just 10% compared with 28% for the Netherlands, 24% for Germany and 18% for France. This is the culmination of several disastrous trends in policymaking over the last few decades.
The roots of much this can be traced to its dysfunctional planning system. Overburdened with regulatory requirements and standards, and endless vetoes from different stakeholders, it has squeezed out small developers, made infrastructure projects expensive and unfeasible, deterred investment and led to a housing shortage that has sucked money away from wages, businesses and investors while distorting incentives towards non-productive rent-seeking from property speculation. For example, the cost of high-speed rail in Britain is £200m per kilometre compared with £25-£32m per kilometre in the rest of Europe. In the period of low interest rates following the crash France installed tram networks in 33 towns and cities and over 1000km of high-speed rail, infrastructure that will serve the economy for decades if not a century. Britain meanwhile has focused on debt-servicing and a generous pension scheme including a “triple lock” on state pensions often channelled towards consumption or speculation in the troubled housing market.
This is part of a wider long term pattern. Since the 1970s Britain has designated no new towns, built just one new nuclear power station out of a proposed thirteen, has not built a new reservoir since 1991 and not built a major intercity railway since the nineteenth century. A toxic mix of nimbyism, fiscal short-sightedness and suffocating regulations have left Britain unprepared for shocks and crises while leaving its debt and deficit little better. For example, in September Liz Truss announced a £130 billion emergency energy bailout to deal with the unfolding crisis but an investment in nuclear energy on that scale according to some estimates could have produced over half of the UK’s electricity. Likewise, memory of the failed protectionism of the 1960s and 1970s has made the British state reluctant to provide support to strategic sectors yet central planning still constrains many sectors capacity for growth, providing a worst of all worlds.
Stagnant productivity and ballooning house prices have been the most obvious effects of this planning system. The average house price in Britain is 65 times higher than in 1970 but the average wage is only 36 times higher. Since 2000 house price growth has significantly outpaced wage growth with stagnant productivity combined with restricted housing supply, net immigration and loose monetary policy producing a vicious pattern. While the UK’s house prices have seen a real terms percentage change of over 400% since 1970, France’s has only been around 175%. On current forecasts real wages in Britain will still be lower in 2025 than in 2008. From 1990 to 2007 average annual productivity growth was 2% but since the crash from 2010 to 2019 it has been 0.6%. By the end of 2019 it was 20% below the level it would have reached if it had continued on its pre- financial crisis path. Worse still, according to OBR projections real wages in the UK will rise by about as much in 19 years as it did in a normal 19-month period before the financial crisis.
Raising Britain’s chronically poor productivity has the been the goal of successive governments since 2007. Initiatives have included the lowering and simplification of taxes, reforms to education, ambitious plans to build infrastructure projects connecting the North and South such as HS2 and expanding the workforce through cheap immigrant labour. Despite holding down consumer prices, immigrant labour has inhibited productivity growth by deterring incentives of capital investment and automation while increasing pressure on overstretched services and infrastructure whose supply capacity is limited by planning restrictions. When George Osborne created the Office for Tax Simplification in 2010, the UK tax code was 11,000 pages long. It is now close to 17,000 pages. Attempts to shrink the state have been misguided and ended up costing more in the long term. Heathrow’s third runway and HS2 have seen endless delays creating a spiral of rising costs. As demonstrated by Liz Truss’ mini-budget, a supply-constrained environment has limited Britain’s fiscal capacity and raised its borrowing costs, forcing it onto a path of high taxes and an austere attitude to investment in state capacity and Research and Development. The political incentives to overhaul such a planning system are non-existent as a nimby-inclined property-owning pensioner class remains the most critical political constituency.
Since the mid 1990s Britain has had the lowest gross fixed capital investment in per cent of GDP per capita of its peers. According to the IMF, gross investment averaged 17.1% of its gross domestic product from 2010 to 2022. In comparison Italy invested 18.6%, Germany 21.1%, the US 20.6% and France 23.3%. In fact, total investment as a percentage of GDP has been lower than its high-income peers since before 2000, consistently below 20% of GDP unlike that of France’s. This is correlated with a low savings rate of 13.3% of GDP in the same years compared with the French 22.6% and German 28.2%. For one thing, the UK minimum pension contribution rate is among the lowest in Europe at 8%. This low saving and consequent low investment rate is likely explained by the poor prospects of domestic demand and production in the UK. The aforementioned restrictive planning system means increasing production capacity in the form of factories, science parks, labs, industrial estates and other infrastructure is slow, difficult, and costly, and therefore increased production an unwise investment. This limited ability to increase production capacity has also meant limited domestic demand for that increased output, perverting incentives towards foreign shares and assets if not consumption and speculation. Attempts to increase the national savings rate, however will merely divert capital abroad unless measures are taken to enable increases in domestic production capacity.
Despite low even negative interest rates, UK businesses have instead borrowed to invest in foreign operations and acquisitions rather than in their own domestic production. Mercantilist foreign economies and limited domestic demand means UK firms have no reason to invest in boosting domestic productivity, and instead rely on returns from foreign shares for their incomes. This, another symptom of the UK’s anti-industrial anti-urban planning processes and services-based model of industrial outsourcing, overseas investment and cheap labour is another major factor in the country’s stagnant productivity. Britain’s economy has deteriorated to the selling of London real estate, private school and university places and services that trade off their prestige rather than their quality to the global elite without maintaining industry in crucial sectors that accumulate long term corporate and industrial infrastructure. Overseas earnings, financial services and prestige-based sectors are vulnerable to sudden collapse and produce a growth that has little knock-on effects on the productivity of other sectors while leading to a highly unequal and regionally disparate national economic landscape.
Two decades of underinvestment and overregulation have been masked by artificially cheap credit, cheap imports from the developing world and immigrant labour. The UK’s sanctions war on Russia and Iran had now undermined its model of using London has a haven for the world’s capital. Financialisation has built in fragility to the economy from shocks and created an environment of bubbles, speculation, inequality and underinvestment. Britain’s service-oriented education system has proved ill-suited to provide for an industrial economy or productivity enhancement with technical and managerial skills lacking and falling standards masked by the historic prestige of its higher-education institutions. Sky-high rents, poor housing prospects, high taxes and stagnant wages now look likely to undermine attempts to attract global talent, while the young are at risk of a brain drain.
Artificially cheap credit from the Treasury’s quantitative easing and open market operations producing low interest rates in the pre-covid era allowed the recovery of the British economy but also recreated many of the conditions of the crash, in this case bubbles and fragile business models involving razor-thin inventories. Likewise, they exacerbated the productivity problem, allowing the survival of low productivity ‘zombie firms’ where capital and resources were tied up. The British private sector has been addicted to cheap labour from immigrant workers and artificially cheap credit, avoiding difficult restructuring and investment in productivity enhancement such as worker training or innovation. The inflation produced by this cheap credit has been absorbed by importing cheap labour and cheap imports rather than through productivity gains, building up debt and inhibiting genuine growth while holding down wages and worsening the nation’s trade deficit and balance of payments. The Treasury has dismissed large-scale planning reform as politically unfeasible and sought to balance the UK’s books through austerity to keep borrowing costs low and its bond-market credible but has starved the country of urgent infrastructure and R&D investment. The structural adjustments to hook the British economy off this productivity-strangling combination will be economically turbulent, financially painful and politically damaging but nevertheless essential if the UK is to avoid an accelerated doom spiral.
At this moment in time, it seems the French strategy, with its dirigiste industrial policy, attempts to preserve national manufacturing, emphasis on long term infrastructure investments and large-scale reliance on nuclear power has been the most resilient in weathering the various shocks and trends of the global economy. The French reliance on nuclear power has no doubt allowed it to weather the effects of the current energy crisis while its support for home industries looks the most effective in this era of global turbulence and fragile supply chains. France is a leader in major industries many of which are still in French hands such as the automotive, railway, cosmetics, and aerospace sectors. Its education system, although lacking the prestige of Britain’s produces a highly skilled workforce, it has for example the highest number of science graduates per thousand workers in Europe. Critics for years have pointed at the inflexibility of French business legislation and the uncompetitiveness of French tax rates but on infrastructure, investment, education and wider industrial strategy its policy choices have proved heavily resilient to the shocks of Ukraine and the 2008 crash unlike Britain’s.
The fragile nature of global supply chains and the emergence of a more hostile and divided global economy has seen a shift towards mercantilist thinking and returned the emphasis to ideas of self-sufficiency in key industrial sectors. Regional inequality and its damaging effects on politics and society have returned the emphasis on industry, while energy crises, pandemics and sanctions have made outsourcing seem unwise. France’s policies are likely to build and maintain the physical and institutional infrastructure and skilled human capital that underpins long-term prosperity and resistance to shocks. The maintenance of industrial structures: of institutions, companies, workers and buildings through state support allows for the re-emergence of successful firms and successful industrialisation from cumulative industrial learning while policies of laissez-faire non-intervention often see such structures and assets weakened, squandered or acquired by foreign states and investors. The French economy like all European economies faces many challenges; but Britain can learn much from its attitude to long-term investment, state support for strategic industries and model based on resisting deindustrialisation.
Sources:
Stagnant UK living standards lay bare the challenge for Jeremy Hunt | Financial Times (ft.com)
The Anglosphere needs to learn to love apartment living | Financial Times (ft.com)
UK Budget: why the economy has grown so slowly | Financial Times (ft.com)
How house prices made Britain an inheritocracy (thetimes.co.uk)
UK economy to shrink more than Russia, predicts IMF | The Independent
Britain’s failure to build is throttling its economy | The Economist
Subscribe to read | Financial Times (ft.com)
Subscribe to read | Financial Times (ft.com)
Ferrovial boss on why high speed rail costs more in UK | New Civil Engineer
How the UK became the sick man of Europe again – New Statesman
UK House Price Index – Office for National Statistics (ons.gov.uk)
IMF Growth Outlook: UK Faces Worst Inflation Shock Among G7 Nations – Bloomberg
The St Andrews Economist 