It is one of the most poorly-timed presidential ascendancies in French history. When Francoise Hollande was elected six-months ago, he inherited a basket case economy with deeply rooted problems. This week we saw an unsurprising credit downgrade from ratings agency Moody’s. Hopefully Australia’s political leaders were watching, as our fate may prove similar.

The fall of Europe comes as no surprise. We have become accustomed to hearing negativity with regards to Greece, Spain and Italy but it becomes more serious when France and Germany are thrown in the mix. The French can be set in their ways and so too is the heavily regulated and protected French economy. Ongoing innovation is the key to economic growth in a constantly changing global economy. Moody’s said the number one reason for the downgrade was that “France's long-term economic growth outlook is negatively affected by multiple structural challenges, including its gradual, sustained loss of competitiveness and the long-standing rigidities of its labour, goods and service markets.”

In other words, ‘if you do what you’ve always done, you will get what you’ve always gotten’. The lack of structural competitiveness and labour force regulation will continue to hinder France in a region of struggling economic performance. The French Prime Minister Jean-Marc Ayrault has already announced payroll tax cuts of $25 billion to correct France’s anti-competitive burden and offset already high payroll charges and employment protection legislation.

France is not alone in burdensome regulation of industry and counter-inventive policies. Sovereign risk has become a major deterrent for companies in many countries. Costs are too high, regulation makes global competitiveness difficult and doing business elsewhere is simply easier and less risky. Changing the perception of France as anti-competitive and providing further incentives for companies to conduct business and create jobs should be a major focus for Monsieurs Hollande and Ayrault. While this is a reactive decision - rather than a long-overdue preventative measure – it will hopefully (but unlikely) be heeded by the Australian government.

Labor: The Drag on Australian Prosperity

In Australia it is Labor, rather than labour that is the problem. The Labor government has been criticised throughout its tenure for its economic management and the soaring sovereign risk for international business. Most industries can’t afford to campaign publically on this issue but the mining industry has deeper pockets and spent around $22 million criticising the Minerals Resource Rent Tax (MRRT), helping to bring down a Prime Minister in the process. They argued that taxing the profits of large mining companies over a particular threshold would make Australian mining uncompetitive and large miners would opt for lower cost, lower risk alternatives offshore. The real cost, however, is unrealised. It is the cost of companies choosing not to do business in Australia because of unpredictable legislation, over-regulation and a government that is prepared to make rash decisions. Large companies will not invest in multi-billion dollar projects if their future profitability is at risk from a government looking to monetise operations today, rather than provide long-term stability. To provide a personal parallel example: if the government placed an additional 30% tax on dividend income from your share portfolio, you would likely put your money into alternative investments. Not only that, you would likely put your money in overseas investments, where it would be of no use to the domestic economy. Although it can’t be measured, the dollar value of 20-years-plus worth of mining projects disappearing offshore must be staggering.

Moody’s also stated that the fiscal outlook remains uncertain, not just because of structural rigidities, but also from “deteriorating economic prospects and subdued domestic and external demand”. In short, in the face of the deteriorating European economy, France should have diversified their reach and made the political environment more ‘business friendly’. Australia, like France, has heavily regulated industries that limit new business ventures. With pro-business nations such as Singapore on our door-step and falling commodities prices affecting our largest export industry, Australia needs to structure incentives to avoid a France-like situation and a downgrade of our own credit rating.

USA on the Move

During the GFC, American industries were crippled by a changing business environment, rising costs and offshore competition. The car industry was all but wiped out leaving a ‘ghost town’ of empty factories and manufacturing plants. The finance industry also took a hit as creative instruments fabricated through the packaging of assets and re-rated mortgages were wiped out and some frivolous, highly leveraged banks required a bail-out. Nevertheless, America has bounced back. Tax cuts were introduced and pro-business incentives have boosted the medical, construction and technology industries. The US is taking steps to be attractive to multi-national corporations.

Life changes and Australia must adapt to remain competitive.

America, Greece, Italy, Spain and now France are past pre-emptive positioning. They are in damage control and are fixing what needs to be fixed to rebuild once profitable domestic economies. Australia is in the more fortunate position of having strong mining infrastructure and contracts not set to expire for many years. As the unsustainable levels of growth in the industrialising world – and in China in particular - fall, we need to plan to remain profitable, diversified and to attract business. The business infrastructure in Australia is excellent but our pro-business reputation is being held back by poor political decisions, lack of loyalty and the over-regulation of labour markets. Our future economic prosperity – like France’s - lies in presenting ourselves as world-leaders in providing an attractive business environment and diversified industry.

Stay Ahead of the Game,

Lachlan McPherson