The sovereign Debt crisis in Europe is making the headlines almost every day now. It started in the peripheral countries and is now spreading to countries like Spain and Italy. Far from being over, this crisis now approaches L’Hexagone.
Up until now, the debt crisis seemed to be exclusive of some Eurozone countries. In fact, both Germany and France, the two biggest economies in the Eurozone, still finance themselves at low interest rates, Germany’s yield being negative in real terms – considered a secure and risk-free asset – and France’s being very close to zero. Aside the sustainability issue (is the current spread in financing costs in the same monetary union sustainable?), a more pressing question arises: is EU’s core really immune from this debt crisis?
It might not be, considering the recent developments. After Standard & Poor’s, Moody’s downgraded the French sovereign debt rating from its triple A, stating that “persistent structural economic challenges” threaten economic growth and that the “rigidities in labour and services markets” are causing France’s “sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base”.
In fact, in modern France, there have been some free-market successes and economic glories alongside many situations of excessive control and important failures. France is the world fifth-biggest economy, one of the biggest exporters and a primary destiny of foreign direct investment, not to mention that it has a favorable demographic outlook with a 2.0 births per women and a positive net migration. Even though, since 1999, French economy was neither brilliant nor disastrous, which is more obvious after the beginning of the Euro, as the tempting cure of devaluation was no longer available and France was given no other choice but to rely heavily on public spending to support economic growth.
The result is clear: France is one of the most public spending dependent economies in Europe. Currently, it represents almost 57% of GDP, with public debt over 90% of GDP (and rising) and a-persistent budget deficit. Growth has stalled and the economy is heading for its second recession in five years.
The high social charges and the very strict labour-market regulation contribute to unemployment being over 10% (with youth employment close to 25%). Moreover the erosion of competitiveness is undeniable: in 1999 labour costs were below German ones and France had a current account surplus, which is no longer the case. Obviously the excessive taxation on wealth, income and profits and the heavy regulation worsen this scenario, discouraging entrepreneurial efforts.
Mr. Hollande and his government have announced some budget cuts and a reform in the labour market but fail to realize that these might be too little too late, probably helding back some pressing reforms due to political reasons.
France economic performance is somehow fragile and if no credible policy changes occur, the markets can start pressing France, as they did with other European countries in the recent past. As The Economist points out, there is “so much to do and so little time”, at any time soon the expectations about France solvency may change and the consequences of a French collapse may be too big to be controlled.
Main Source: The Economist – France: Special Report