France's economy is 65.4 percent free, according to our 2008 assessment, which makes it the world's 48th freest economy. Its overall score is 2.5 percentage points higher than last year. France is ranked 25th out of 41 countries in the European region, and its overall score is lower than the regional average.
France scores above the world average in eight of 10 economic freedoms and especially strongly in business freedom, property rights, and freedom from corruption. As a member of the European Union, it has a standardized monetary policy that yields relatively low inflation, despite agricultural distortions. Property is protected by transparent rule of law.
However, France's fiscal freedom and government size scores are extraordinarily weak. As in many other European social democracies, government spending and tax rates are exceptionally high to support an extensive welfare state. Government expenditures are more than half the size of the nation's GDP. Background: In the wake of the government's failure to enact serious market reforms in the 1990s, France's economy has suffered significantly in comparison to the economies of its Western neighbors. Faced with chronic unemployment, lack of growth, and escalating social disorder, France elected conservative reformer Nicolas Sarkozy to the presidency in 2007. Immediate challenges will be to introduce new labor legislation and reform the tax code to make work pay. France continues to be both a driving force for further European integration and a major recipient of enormously distorting agricultural subsidies under the European Union's Common Agricultural Policy. Protectionist policies toward politically sensitive industries such as wine, cheese, and mustard are likely to continue under Sarkozy, as is state intervention to protect French jobs from the perceived pressures of globalization.
Business Freedom - 87.1%
The overall freedom to start, operate, and close a business is well protected by France's regulatory environment. Starting a business takes an average of seven days, compared to the world average of 43 days. Obtaining a business license requires less than the world average of 19 procedures and 234 days. Closing a business is relatively easy.
Trade Freedom - 81%
France's trade policy is the same as those of other members of the European Union. The common EU weighted average tariff rate was 2 percent in 2005. Non-tariff barriers reflected in EU policy include agricultural and manufacturing subsidies, import restrictions for some goods and services, market access restrictions in some service sectors, non-transparent and restrictive regulations and standards, and inconsistent customs administration across EU members. Lack of transparency in standards and regulations, barriers to service market access, and pharmaceutical restrictions exceed EU policy benchmarks. Consequently, an additional 15 percentage points is deducted from France's trade freedom score.
Fiscal Freedom - 53.2%
Beginning with the 2006 tax year, the top personal income tax rate is 40 percent, down from 48.1 percent. The top corporate tax rate is 33.8 percent (33.3 percent plus a 1.5 percent surcharge). Other taxes include a value-added tax (VAT) and a business tax. In the most recent year, overall tax revenue as a percentage of GDP was 44 percent.
Freedom from Government - 13.2%
Total government expenditures, including consumption and transfer payments, are very high. In the most recent year, government spending equaled 53.8 percent of GDP. State-owned or state-controlled enterprises dominate such industries as postal services, electricity, and rail. Semi-public companies in which the state holds shares employ almost 4 percent of the labor force.
Monetary Freedom - 81.2%
France is a member of the euro zone. Between 2004 and 2006, France's weighted average annual rate of inflation was 1.9 percent. Relatively low and stable prices explain most of the monetary freedom score. As a participant in the EU's Common Agricultural Policy, the government subsidizes agricultural production, distorting the prices of agricultural products. Prices of pharmaceuticals, books, electricity, gas, and rail transportation are regulated. Consequently, an additional 10 percentage points is deducted from France's monetary policy score.
Investment Freedom - 60%
Regulations are fairly simple, and many incentives are available. Foreign companies complain of high payroll and income taxes, pervasive regulation of labor and products markets, and negative attitudes toward foreign investors. Prior approval is necessary for investment in strategic sectors like public health, defense, or casinos. In late 2006, the European Commission challenged the EU legality of France's investment regulation law. Foreign investment is restricted in sectors like agriculture, aircraft production, air transport, audiovisual, insurance, and maritime transport. Residents and non-residents may hold foreign exchange accounts. There are no restrictions or controls on payments, transfers, or repatriation of profits, and non-residents may purchase real estate.
Financial Freedom - 70%
France's financial, legal, regulatory, and accounting systems are somewhat burdensome but consistent with international norms. There is no distinction between commercial and investment banks. Most loans are provided at market terms. The government has sold its majority stake in most financial institutions but still owns the Caisse des Depots et Consignations and holds minority stakes elsewhere. At the end of 2005, 161 foreign banks, including 57 non-EU banks, accounted for about 10 percent of total assets. France is the world's fourth-largest insurance market, and foreign companies held 21.5 percent of the market in 2004. The government owns stakes in several insurance companies. Capital markets are well developed, and foreign investors participate freely.
Property Rights - 70%
Contractual agreements are secure, and the judiciary and civil service are professional, though bureaucratic entanglements are common. Any company defined as a national public service or natural monopoly must pass into state ownership. Protection of intellectual property rights is strong.
Freedom from Corruption - 74%
Corruption is perceived as minimal. France ranks 18th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006. France enforces the OECD Anti-Bribery Convention domestically through amendments to its criminal code.
Labor Freedom - 63.8%
Employment rules could be further improved to enhance employment opportunities and productivity growth. The non-salary cost of employing a worker is very high, and dismissing a redundant employee can be relatively costly. Restrictions on the number of work hours remain inflexible.
