Mon dieu! Will France drag the rest of the eurozone lower?

No, it doesn’t feel like much like a eurozone recovery. Not when France, the second-largest economy in the 17-nation currency bloc, seems set to fall into recession again.

While the eurozone’s output barely managed to grow by 0.1% in the June to September quarter, French economic output shrank by 0.1%. France and Germany combined account for almost half of eurozone output. At the moment, any positive developments in German GDP are being offset by sinking French output, dragging overall eurozone GDP lower. No wonder the rest of the eurozone is concerned.Most experts believe that with no sign of a turnaround in France, a sustained recovery in the eurozone is unlikely.

What is happening in France isn’t taking anyone by surprise. Since last year, several market watchers have warned that France could become the ‘sick man of Europe’ in 2013.

France’s economic vitality is being sapped by a number of factors, and the fear is that the government is doing too little to change the situation. French businesses have been struggling with issues of lack of competitiveness for over a decade. The labour market remains scerlotic even as the unemployment rate stays stubbornly high at 10.5%. A slew of companies, with diminishing hopes of profitability, are preparing to axe workers, even as, according to this Wall Street Journal report.

Meanwhile, the government has become the major driver of the economy, accounting for 57 percent of GDP, well above the eurozone average, according to this National Interest report. That’s especially bad news because government finances are in the red, exceeding an EU requirement limiting budget deficits to 3% of GDP.

Socialist President Francois Hollande’s heavy-handed tax measures have also given the impression that the government is “anti-business”.

The country badly needs structural reforms, especially in the labour market, but the government doesn’t seem to be doing much in that direction.Two years ago, France lost its prized triple A credit rating ratings agencies two years ago. More recently, Standard and Poor’s cut the country’s rating further to AA  from AA+ on the belief that it is not doing enough to tackle the problem of high unemployment and low growth.

If France does tip into recession again and the government continues to delay undertaking urgent reforms, European Central Bank President Mario Draghi will have even more reason to consider unconventional monetary tools to juice the eurozone. If not, the sick man of Europe threatens to drag the rest of Europe down with him.

[Image Credit]

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s