September 2014 Issue
The European economy suffered terrifically in the wake of the financial crisis. Record high levels of unemployment, government bailouts and banking crises have punctuated the last five or six years on the continent. More recently, a genuine recovery appears to be underway. Countries including Spain, which were on the brink of total financial collapse, have begun to pick up. It appears that the eurozone’s most protracted and painful recession is finally over.
Indeed, in a year by year comparison with the first quarter of 2013, the European economy recorded GDP growth of 0.9 percent in Q1 2014. The improvement was built on better than expected growth in two of Europe’s economic powerhouses. Germany recorded growth of 2.3 percent while the UK chalked-up 3.1 percent. Undoubtedly, for the first time in a long while, both confidence and growth is up across the continent. But despite the nascent recovery, not every rose in the European garden is blooming. The continent’s second biggest economy, France, is wilting.
Despite the government’s prediction that the economy will expand by 1 percent this year, in the first quarter France’s economy has stagnated. According to statistics released in June, growth was flat. This news came just a day after the level of unemployment in the country rose to a record high of 10 percent in May. Although French unemployment figures remain below the European average of 12 percent, the number is still double that of its neighbouring economic powerhouse Germany.
“Under the reform program there will be no more tax rises and there will be greater incentives provided to business in order to kick start investment.”
Furthermore, although statistics for the second quarter did show growth at 0.2 percent, confidence in the economy remains markedly low. Predictions have also been cut. The French national statistics bureau has announced that it expects the economy to expand by just 0.7 percent this year. However, in some quarters that figure too is considered rather optimistic, as the latest Purchasing Manager’s report released in June shows contractions in both the French manufacturing and services sectors. Such is the country’s economic outlook, there have been suggestions that the country could lapse into recession as the year progresses.
Should this economic lethargy persist and plunge the country into a damaging recession, there may be serious consequences for the rest of the European economy. There is growing concern within the European Economic Community (EEC) that unless something is done to address the French problem, the burgeoning recovery of the whole eurozone could be threatened.
To address the myriad economic issues, President François Hollande’s government has begun to take action. Firstly, he has asked his European partners to exempt investment spending from deficit figures. He has also requested that the eurozone nations push back a deadline for reducing the budget deficit to 3 percent of GDP. With permission of the European community, Mr Hollande’s government believes the economy will be able to reach that target in 2015.
Despite Mr Hollande’s belief that he can turn around France’s sputtering economic machine, a stream of pessimism toward the French economy is permeating the wider financial sector. A report released by PwC in July suggests that the French economy will be overtaken by the UK, causing it to slip from fifth to sixth place in the GDP rankings by 2020, and as low as eighth by 2030. According to PwC, the French government has not done enough to relax strict labour laws and apply much needed structural reforms to bolster wider economic performance. The PwC report followed closely on from a report from the International Monetary Fund (IMF) which noted that France’s economic prosperity is at risk due to particularly high levels of unemployment. France’s trade deficit also widened in May, climbing to €4.9bn from €4.1bn in April.
Despite his critics, Mr Hollande is attempting to address the country’s economic decline. Earlier in 2014 he appointed a new Prime Minister, Manuel Valls, who has been particularly critical of prior economic policy. According to Mr Valls, France has been “living beyond its means” for some time, and needs to end its “suspicion” of business. Mr Valls has pledged to engage with the business community and hopes to encourage investment and job growth. To that end, the new government is committed to initiating a program of financial and economic reform. Under the reform program there will be no more tax rises and there will be greater incentives provided to business in order to kick start investment. The reforms, known as the ‘responsibility pact’, were signed by Mr Hollande in March and will see $14bn of cuts to social charges on firms. The pact will also see public-sector budget savings of around €50bn between 2015 and 2017.
Mr Valls has claimed that France is experiencing an identity crisis over its economy. Regardless of the country’s political leanings, the most important thing for France at this stage is growth. By engaging fully with the business community, there is still a good chance that recession can be averted.
© Financier Worldwide
BY
Richard Summerfield