Economic impact of 2008 financial crisis in France, policy responses

Abstract

The global recession referred to as the ‘Great Recession’ witnessed by the world was triggered by the financial crisis of 2007-2010 which started from US. Few reasons attributed to this crisis were: excessive debt levels, sub-prime lending, government deregulation, CDS and CDOs, etc. Due to growing economic and financial integration at the global level, the crisis in US hit Europe as well. France was also hit due to its close relations with US in terms of trade and financial ties. The trade impact was through decreased exports to US though the domestic demand was sustained through strong social security net. The financial impact was due to (a) decrease in profits from FDI exposures of France to US and (b) Exposure of French banks to the mortgages granted to high risk consumers in US. To counter the impact of the recession that resulted from the financial crisis, French Government took steps in the form of subsidies and stimulus packages to specific industries. As part of the stimulus package, the Government of France set aside $480 billion as guarantees on inter-bank lending and injected money into the banking system. Subsidies for agriculture in industrialized countries like France increased considerably during this period. French government also set aside funds to help the country's auto and construction industries, two sectors that were hit particularly hard by the slump in demand. To support the auto industry, that employs 10% of France’s workforce, the Government extended credit guarantees and financing. In the CCS study, the stimulus to various sectors of the economy has been analyzed with the help of pre and post crisis data and government actions in each of these sectors has been critiqued. It has been observed that while some of the actions have been short term measures for quick recovery, the government has also attempted to attack some of the structural issues in sectors like auto and banking. This will be discussed in the following sections.