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N°18
JUNE 2013
ECONOTE
Société Générale
Economic Studies Department
FRANCE: WHY
HAS THE CURRENT ACCOUNT BALANCE
DETERIORATED FOR MORE THAN 10 YEARS?

Between 1999 and 2012, France's current account balance
worsened markedly, going from a surplus of EUR35bn to a deficit of around
EUR40bn.

This change can be explained by the deterioration of France's trade
balance. It can also be read through the prism of domestic sectors’ financial
imbalances: the deterioration of the current account balance has been due
to the sizeable increases in the public deficit and financing needs of nonfinancial corporations.

In particular, since the crisis, the funding needs of non-financial
corporations have increased markedly: their investment and payrolls have
only partially been adjusted to the slowdown in activity.

Companies' slow reaction to the crisis thus far has benefitted to
household income and consumption. However, this is a risk factor for
growth: if companies had suddenly to make those adjustments, it could
trigger a steep decline in private investment and employment.
CURRENT ACCOUNT AND ITS COMPONENTS
In bn EUR
150
Others
100
50
Public sector balance
0
Non financial private
sector balance
-50
Trade balance
-100
Current account
-150
-200
1999
2012
External equilibrium
1999
2012
Internal equilibrium
S ource: INS EE
Benoît HEITZ
+33 1 58 98 74 26
[email protected]
ECONOTE | N°18 – JUNE 2011
FRANCE'S CURRENT ACCOUNT
BALANCE HAS CONTINUOUSLY
WORSENED FOR THE LAST TEN YEARS
After reaching a high in 1999, France's current account
has markedly deteriorated. It has gone from a surplus
of EUR35bn in 1999 (i.e. 2.6% of GDP) to a deficit of
EUR42bn in 2012 (-2.1% of GDP) according to national
accounting standards1.
ONGOING DETERIORATION
BALANCE...
OF
THE
TRADE
Considering France's external balances, the reason
behind the deterioration in the current external balance
is clear: the worsening trade balance (of goods and
services). In fact, the latter has gone from a surplus of
EUR29bn in 1999 to a deficit of EUR45bn in 2012, thus
accounting for nearly the entire EUR77bn decline in the
external current account balance (see graph. 1).
...
OR
AN
INCREASE
IN
THE
FINANCING
REQUIREMENTS OF THE GENERAL GOVERNMENT
AND NON-FINANCIAL CORPORATIONS
In a second possible interpretation, a deterioration in
the external current account balance reflects a drop in
the national economy's net lending position. In this
respect, this deterioration of the French current
account derives from the sharp increase in the
financing needs of non-financial corporations and
public administrations, which have been offset only
partially by the increase in savings of households and
financial companies (see graph. 2).
GRAPH. 2: NET LENDING/BORROWING
In bnEUR
100
50
0
GRAPH. 1: FRENCH EXTERNAL
BALANCES
-50
40
-100
20
-150
1999
0
2001
2003
2005
Non financial corporations
Financial sector
Public administrations
Households
Current account
-20
-40
-60
-80
1999
2001
2003
2005
2007
2009
2011
Current account
2007
2009
2011
S ource: INS EE
In other words, the increase in the savings of
households and financial companies was not enough
to finance the expanding public deficit and the drop in
non-financial corporations self-financing capacity.
Trade balance (goods and services)
Source: INSEE
When we take a more detailed look at the trade
balance in France, it becomes clear that the
deterioration has resulted from two well-known factors:
•
France's energy bill has gotten more expensive,
due notably to the rise in the price of a barrel of oil
(EUR17 in 1999 to EUR87 in 2012);
•
Deterioration in the balance of trade of
manufactured goods, which reflects French
industry's loss of competitiveness.
1
According to the balance of payments definition, the current
account balance has gone from a surplus of EUR43bn in 1999 to
a deficit of EUR47bn in 2012. In this study, we will use the
national accounting definition, since it allows us to compare in a
consistent manner the changes in the current account balance in
two but equivalent ways: one is focused on external balances and
the other on internal balances (see inset 1).
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ECONOTE | N°18 – JUNE 2013
INSET 1 - THE TWO VIEWS ON THE EXTERNAL CURRENT ACCOUNT
The current account balance of a country can be interpreted in two different ways, which are, from an
accounting perspective, the exact mirror of one another. The first among them is based on external
accounts and is a snapshot of a country's external balance. The second, which is more focused on the
internal situation of a country, depicts the equilibrium between a nation's savings and its investments.
In the first approach, the country's current account balance is the difference between current payments
(trade of goods and services, revenues and transfers) received by the rest of the world and the payments
France makes to the rest of the world. It is usually composed of three items:

The trade balance: the difference between exports and imports of goods and services.

The balance of income and current transfers: the main transactions between France and abroad
considered here are the payments from investment revenues (interest and dividends), employee wages (e.g.
for cross-border workers) as well as transfers between the French public entities and European institutions.

The current transfers balance: the balance includes, notably, the funds that migrant workers send
back to their home countries (i.e. remittances), write-offs, sales of patents, land or mines.
In the second approach, which is merely a different accounting description of the same data, we focus more
on the internal balances of the economy. The current account is defined as being the difference between a
country's savings and investment, which is typically broken down into the following sectors:

Non-financial corporations

Financial companies

Public administrations, i.e. mainly the government, local authorities and social security bodies

Households

Non profit institutions serving households
For example, two different interpretations of a current account deficit are possible: in the first, the country
pays more to the world than it receives, e.g. because it has a trade deficit; in the second, the country invests
more than it saves, which means it will need to look overseas to fund itself.
THE FINANCIAL SITUATION OF THE
CORPORATE SECTOR HAS WORSENED
SINCE THE CRISIS
fluctuated hovering around 3% between 2002 and
2008, peaking at 4.1% of GDP in 2003. In all, poor
public finances resulted in a EUR40bn drop in the
current account from 1999 to 2008.
However, this broad trend over the period 1999-2011
actually conceals three distinct realities: pre-crisis, the
2008-2009 crisis and finally the phase spanning
2010-2011.
Second, non-financial corporations' funding needs
grew markedly from 2004, under the effects of a rapid
increase in their investment. In fact, during these years,
the upward climb of corporate investing was
significantly higher than the expansion of their
businesses. As a result, this boosted their investment
ratio, which, in 2008, reached a high France hadn't
seen since 1974 (see graph. 3). The funding needs of
non-financial corporations rose from EUR11bn in 2003
to EUR58bn in 2008.
BEFORE
THE
CRISIS,
A
RISING
BUSINESS
INVESTMENT RATE AND A DEEPENING PUBLIC
DEFICIT
Between 1999 and 2008, the deterioration of France's
current account balance, which went from a surplus of
EUR35bn to a deficit of EUR37bn, was the result of two
distinct factors.
First, public deficit got significantly worse. Between
1999 and 2001 it was about 1.5% of GDP, it then
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ECONOTE | N°18 – JUNE 2013
GRAPH. 4: NON FINANCIAL
CORPORATIONS' NET
LENDING/BORROWING
GRAPH. 3: NON FINANCIAL
CORPORATIONS' INVESTMENT RATIO
As %
200
150
23
100
50
0
22
21
19
-50
-100
-150
18
-200
-250
20
1999
17
2001
2003
2005
2007
2009
2011
Investment
Stocks
16
1970 1975 1980 1985 1990 1995 2000 2005 2010
Savings
Net lending/borrowing
S ource: INS EE
S ource: INS EE
Lastly, financial companies increased their savings by
nearly EUR10bn, as the drop in short-term interest
rates improved their margins3.
However, over this whole period, beyond sometimes
sharp fluctuation, households' funding capacity
remained mostly stable and financial companies'
funding capacity only rose marginally.
SINCE THE CRISIS, THE CORPORATE SECTOR’S
AT THE CRISIS PEAK, BUSINESS INVESTMENT FELL
FINANCIAL
AND THE PUBLIC DEFICIT JUMPED
CONSIDERABLY
In 2009, under the effects of the crisis, changes were
very sharp for all economic agents. In the end,
however, this halted the deterioration of France's
current account balance.
Since the crisis, France's current account deficit has
deepened once again, standing at EUR42bn in 2012,
after a high at EUR49bn in 2012.
France's public deficit shot up as income fell sharply
due to the poor economic environment and the
authorities’ implementation of stimulus plans. The
public deficit jumped from 3.5% of GDP to 6.4% of
GDP, i.e. a nearly EUR80bn deterioration.
This sharp increase of higher public funding needs was
compensated, however, by the improvement of the net
lending position of the other sectors.
Faced with the crisis, households increased their
savings by one point over the year, and significantly
reduced their investment spending.2 This freed up extra
finance capacity of over EUR30bn.
Non-financial corporations were faced with the drop in
their savings (because business was down) but, more
importantly, they made deep cuts in their investments
and reduced their inventories. Consequently, they
reduced their financing needs over the year by more
than EUR40bn (see graph. 4).
SITUATION
HAS
DETERIORATED
This deterioration is mainly attributable to the increase
in non-financial corporations' increased financing
needs (more than EUR40bn). It also comes from a
decrease in households’ net lending position (more
than EUR10bn): their savings remained stable whereas
their investment increased. However, it was limited by
the improving public finances, which reduced the
State's need for funds by more than EUR40bn.
The sharp increase in non-financial corporations'
funding needs stems from a scissors effect between,
on the one hand, an erosion in their margins and, on
the other hand, an investment level that has rebounded
sharply and then stabilized in 2012 despite an
unfavourable economic environment fraught with
uncertainty.
Thus, in 2011, the investment rate of non-financial
corporations returned to record highs from 2008 while
their margin has been down sharply to its 1985 lows as has their self-financing ratio (see graph. 5).
3
2
Primarily households' acquisition of new homes.
This result is not contradictory with the sharp decline in financial
companies' earnings over the same period. In fact, losses on
investments (due to the crisis) did not have an impact (in national
accounting standards) on their revenues or their savings but have
had a direct impact on their assets.
4
ECONOTE | N°18 – JUNE 2013
GRAPH. 5: NON FINANCIAL
CORPORATIONS' FINANCIAL RATIOS
As %
As %
34
140
32
120
30
100
28
80
26
60
24
40
22
20
20
0
1970 1975 1980 1985 1990 1995 2000 2005 2010
Profit ratio (LHS)
Self financing ratio (RHS)
S ource: INS EE
FINANCIAL IMBALANCES IN THE
CORPORATE SECTOR ARE A KEY RISK
WEIGHING ON THE ECONOMIC OUTLOOK
ONLY A PARTIAL ADJUSTMENT IN EMPLOYMENT
AND BUSINESS INVESTMENT THUS FAR
This deterioration in the financial situation of the
corporate sector derived from the only partial
adjustment of two factors to the low levels of activity:
one, non-financial corporations have been investing
heavily relative to the weakness of their activity, which
has resulted in record investment levels; two,
employment adjustments were limited compared with
the fall in economic activity and its weak rebound
thereafter (see graph. 6).
As %
GRAPH. 6: NON-FARM PRIVATE
SECTOR EMPLOYMENT AND VALUE
ADDED
5
4
3
2
part, while it had increased an average of 1.3% per
year over the previous decade. Consequently,
employment in companies has only partially adjusted
to lower activity and their profitability has suffered as a
result. As a consequence, the value added split moved
towards a higher share to remunerations (around 65%
pre-crisis to nearly 68% in 2012).
A MORE MARKED ADJUSTMENT WOULD WEIGH
HEAVILY ON THE ECONOMY
These maladjustments of investment and employment
constitute a significant risk for the French economy.
Of course, one way to absorb them would be to return
to strong growth. Measured job creation and a
contained increase in investment would make it
possible to gradually return to a more balanced
situation, with companies steadily restoring their
profitability. Unfortunately, given the current economic
situation, such a scenario seems unlikely.
Another possible path would be far more painful. In
fact, given current business activity, companies would
need to pull back on investment and employment.
Because companies failed to make substantial
adjustments, these reductions could be large in scale.
Thus, to bring their investment ratio back to pre-crisis
levels, non-financial corporations would have to cut
investment spending by nearly 7%, which is the
equivalent to 0.7% of GDP. And to make up for the
productivity lag accumulated over the past four years
compared with the trend over the previous ten years, it
would be necessary to cut non-farm private
employment by more than one million positions.
THIS LACK OF BUSINESS ADJUSTMENT HAS SO FAR
SUPPORTED HOUSEHOLD INCOME
Over the entire period, household income increased
faster than nominal GDP (around 0.3% per year), which
reflects the distortion, in favour of households, in how
added value is shared. This distortion enabled
household consumption to increase at a relatively
strong rate compared with GDP - despite a
simultaneous rise in the savings rate.
In addition, automatic stabilizer mechanisms and
stimulus measures also supported household income.
1
0
The relatively good resiliency of the situation of
households therefore came at the detriment of
corporations and public finances: corporate margins
dropped significantly while public finances worsened.
-1
-2
-3
-4
-5
1997
1999 2001 2003 2005 2007 2009 2011
Productivity
Value added
Employment
S ource: INS EE, calculs S G
From 2008 to 2012, the productivity of labour in the
non-agricultural private sector stagnated for the most
This takes us back to the argument explaining the
nation's deteriorating current account balance: it
reflects a national savings deficit relative to investment.
In the case of France, this mainly concerns an increase
in consumption: over the period, consumption (private
and public)/GDP rose 3pp and, to a lesser extent,
investment/GDP also rose by 1.5pp. Mirroring the
5
ECONOTE | N°18 – JUNE 2013
conclusions outlined previously, the counterweight has
been a drop in the net external trade/GDP ratio, which
went from being slightly positive to negative.
INSET 2 - OVER-CONSUMPTION IN FRANCE VS UNDER-INVESTMENT IN GERMANY?
While France's current account balance was falling sharply, that of Germany improved markedly over the
period 1999-2012 (see graph. A). It went from a deficit of 1.3% of GDP in 1999 to a surplus of 7.0% of GDP
in 2012. Like France, this change came about mostly as a result of international trade. The interpretation that
is usually made of this situation is that Germany's moderate payroll and low inflation enabled German
companies to strengthen their financial health and make big strides in competitiveness, which boosted
exports. Indeed, German exports have been strong, compared with those of France, and more broadly
compared with other countries in the euro area. Unlike what is happening in France (see graph. A), the
distortion in how added value is shared was made at employees’ losses in Germany.
As %
GRAPH. A: NON FINANCIAL CORPORATIONS'
PROFIT RATIO
45
43
41
39
37
35
33
31
29
27
25
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Germany
France
S ource: euros tat
However, another interpretation is possible if we look at the balance between the country's savings and
investment. As pointed out earlier, the deepening current account deficit in France was mainly due to higher
private and public consumption, which was stronger than nominal GDP, and to a lesser extent to investment
growth. In the case of Germany, the accumulation of surpluses is not fed by rising household savings: in fact
household income and consumption increased broadly in line with GDP. Rather, it reflects weak investment,
which is substantially lower than GDP (see graph. B). The consequence has been that the weight of
investment/GDP in Germany dropped from 22% in 1999 to 17% in 2012, when it went from 18% to 20% in
France.
France
Germany
Graph. B: AVERAGE YEARLY GROWTH RATE 1999-2012
Investment
Public consumption
Private consumption
GDI of households
Nominal GDP
Investment
Public consumption
Private consumption
GDI of households
Nominal GDP
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%
S ource: Ins ee, Des tatis
6
ECONOTE | N°18 – JUNE 2013
NUMÉROS PRÉCÉDENTS ECONOTE
N°1
The dollar: the American’s currency, their problem?
Benoît HEITZ (March 2011)
N°2
Is Africa about to take off?
Clément GILLET (May 2011)
N°3
United States: State and local governments are dampening the recovery
Clémentine GALLES, Kim MARCH (June 2011)
N°4
China: Internationalization without convertibility of the renminbi
Sopanha SA, Meno MIYAKE (December 2011)
N°5
Eurozone periphery adjustment: is Latvia an example?
Anna SIENKIEWICZ, Ariel EMIRIAN (January 2012)
N°6
United Kingdom: Is the spectre of inflation back?
Marc-Antoine COLLARD (February 2012)
N°7
China: Foreign direct investment outflows— much ado about nothing
Sopanha SA, Meno MIYAKE (May 2012)
N°8
Turkey: An atypical but dependent monetary policy
Régis GALLAND (July 2012)
N°9
UK Quantitative Easing: More inflation but not more activity?
Benoît HEITZ (July 2012)
N°10 Housing market and macroprudential policies: is Canada a success story?
Marc-Antoine COLLARD (August 2012)
N°11 The Eurozone: a unique crisis
Marie-Hélène DUPRAT (September 2012)
N°12 Germany’s export performance: comparative analysis with its European peers
Marc FRISO (December 2012)
N°13 Financing governments debt: a vehicle for the (dis)integration of the Eurozone?
Léa DAUPHAS, Clémentine GALLÈS (February 2013)
N°14 China: Housing Property Prices: failing to see the forest for the trees
Sopanha SA (April 2013)
N°15 China: The growth debate
Olivier DE BOYSSON, Sopanha SA (April 2013)
N°16 Developed countries: who holds public debt?
Audrey GASTEUIL-ROUGIER (April 2013)
N°17 US energy independence
Marc-Antoine COLLARD (May 2013)
7
ECONOTE | N°18 – JUNE 2013
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