France takes first steps to defuse 'time bomb'
France has been in the spotlight in recent weeks, after a number of high-profile reports that cast a critical eye on the economy’s long-term growth prospects. The unwanted attention bubbled to the surface following the unveiling of a government-commissioned report on French competitiveness during the first week of November that warned of an “emergency situation”, and called for a “competitiveness shock”.
The dust had barely time to settle when a second wake-up call was delivered in a report by the International Monetary Fund (IMF), which noted that the “growth outlook for France remains fragile”, and that “the ability of the French economy to rebound is undermined by a competitiveness problem”. The IMF called for – among other things – a quality fiscal adjustment and labour market reforms.
The urgent need for change emanating from the two reports was echoed by a much-publicised supplement in the Economist just days later, which warned of a “time bomb”. The costliest blow was reserved for the credit rating agency, Moody’s, which stripped the French sovereign of its triple-A rating, citing the economy’s lack of growth and loss of competitiveness.
Investors took the spate of French economy-bashing in their stride, and sovereign bond prices barely registered a reaction. Indeed, the yield on the 10-year bond is unchanged since the start of November, and almost 150 basis points below the levels recorded 12 months ago. The lack of a market response begs the question: Is France really the “sick man” of Europe?
On paper, the French sovereign looks no worse than its euro zone neighbours and far better than either Japan, the US, or the UK, with a projected fiscal deficit amounting to 4.7 per cent of GDP in 2012, and a public debt ratio of 90 per cent. However, the economy is beset by numerous structural problems that are certain to surface sooner or later.
The concern must be that the benign view taken by the financial markets will contribute to a sense of complacency that precludes any meaningful reforms, such that the gap with other euro zone countries will continue to widen – and particularly so, given the measures taken in the periphery.
Nowhere is the deterioration in the French economy’s competitiveness more visible than in the current account position, which swung from a small surplus in 1999 to an expected deficit of almost €100 billion in the current calendar year. The adverse shift in the external account occurred as the export sector suffered a dramatic decline in market share. Indeed, France’s share of exports to the rest of the European Union declined by more than 25 per cent from 2000 to 2011, while the European Commission observes that its share of world exports fell by a fifth between 2005 and 2010.