Olivier Jean Blanchard and Pierre Alain Muet

Over most of the last decade, France has followed increasingly rigorous policies. The 'hard franc' approach has meant that external competitiveness is no longer sought through devaluation. Instead the new policy is to achieve a lower inflation rate than abroad. In principle the 'competitiveness through disinflation' approach should work and eventually bring down the unemployment rate, which has remained broadly unchanged at a high level for many years, while maintaining external balance. This article investigates whether the policy is working.

Inflation is lower than in Germany. Profits have steadily increased and trade balance has been reestablished, but unemployment is higher than in 1983. The policy has been more successful at bringing down inflation than at returning the economy to lower unemployment. The adjustment process has been protracted. Credibility effects have not been fulfilled, but nor however have fears that the drastic change of policy might prove unusually disruptive. It simply turns out that the policy is working very slowly. It would take an improbable 30% accumulated competitiveness gain to bring unemployment down by 3%, which does not seem acceptable to France's trading partners.

You do not currently have access to this article.