Commentary:
Almost 20 years ago, I had the opportunity to interview Alejo Vidal-Quadras Roca, Vice President of the European Parliament, which is one of the five governmental branches of the European Union (EU). At that time, Vidal-Quadras Roca discussed a myriad of factors that he believed would economically affect the European Union in the future. He mentioned Europe’s struggle to innovate, stagnant GDP growth rates, EU members’ entitlements, and the aging population in western Europe. I have thought about this interview as I have been monitoring French President Emmanuel Macron’s effort to raise the retirement age in France from 62 to 64.
Macron was vocal about making this change during his last reelection cycle, stating that this was necessary to keep France’s pension system solvent and to prevent it from going into a deficit, as the country’s life expectancy rises and its population continues to age. Needless to say, this was not a popular subject with many French citizens, who organized strikes to voice their displeasure and to shut down sectors of the economy. Macron worked hard to get his initiative in front of the nation’s lower House of Parliament, but it was not certain that he had the votes to get it passed. Therefore, he used special constitutional powers granted to his office to enact the change. French politicians and citizens then ratcheted up their backlash, and the protests have continued, stretching back to January.
France is one of the largest economies in the world, with a Gross Domestic Product (GDP) of $2.63 trillion. In terms of economic productivity, measured by GDP per hour worked, France is ranked seventh in the world, one spot ahead of the U.S. These are two factors that Vidal-Quadras Roca need not have worried about all those years ago. However, this EU official has proven to be a prophet pertaining to other issues.
The first is low GDP growth rates. France’s GDP growth rate was 2.9 percent in 2021, compared to 3.7 percent in the U.S. for the same time period. While it is true that developing countries account for the highest GDP growth rates on the list, and developed countries have lower growth rates, France’s 2.9 percent could be considered underperforming and disappointing, especially as most countries experienced strong demand in an economic boom created by the pent-up forces of the pandemic.
Vidal-Quadras Roca was also spot on about his other concerns, the first of which is the aging population in Europe, and how this could affect future economic growth and government spending. France has a population of approximately 65 million, more than 13 million of which are 65 years of age or older. This means that 20 percent of its entire population is over 65 years old. In the U.S., which has nearly 330 million people, this ratio is 16 percent. In France, this technically means that up to 20 percent of its population can be retired and out of the workforce. This puts pressure on the younger demographic to take care of and pay for their elders’ pensions and healthcare.
The other issue that the EU official was right about is entitlements. Vidal-Quadras Roca was concerned about the generous vacation, paternal/maternal leave, personal leave, and healthcare packages that most western European countries offer to their citizens. In France, employees are entitled to vacation time equivalent to 2.5 working days per month for a maximum of 30 days per year. The country also offers generous maternal and paternal leave.
A simple human fact is that it is hard to take back what has already been given. It should be expected that French citizens are not going to give up their early retirement age or other entitlements very easily. In this sense, the French are a lot like the U.S. One only has to remember how long it took the U.S. to address welfare reform, which many say is still not resolved.
Many of us will look upon the French entitlements with awe and envy. Most American workers are only entitled to a maximum of two weeks paid leave per year. In the U.S., full retirement age is 66 or 67, depending on when you were born. At face value, it certainly looks like the French have a better deal than most Americans. However, it can be argued that Macron has recognized the precarious situation in which his country finds itself – an aging population that is allowed to retire relatively early to enjoy pension benefits, for which an increasingly smaller population base has to pay.
Added to this is the competitive threat France faces by having rising government spending and fewer people to innovate. Retirees, especially younger ones, take their institutional knowledge out of the workforce. Given its situation, France’s federal government and its labor force need to negotiate a solution, which over time resolves its retirement issue in order to continue to compete in the global market.