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Is France’s Economy a Surprise Threat to Eurozone?

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The “bad boys” of the southern Eurozone, Greece, Spain and Italy, have gotten most of the attention in the thorny question of a possible Eurozone breakup. Even little Cyprus has been in the spotlight, although its economy is small enough that failure to work out a deal for a bailout would not necessarily have threatened the currency union.

But the real threat may lie in an unexpected direction: France. It lost its AAA credit rating from Moody’s in January and is beset by controversy and hard times. Its unemployment rate hit a record high in April of 10.6%. Although lower than the Eurozone’s average rate of 11.4%, it’s still rising, and likely to keep doing so as its economy shrinks.

Rising unemployment, falling exports, and an increasingly negative trade balance have combined with other problems—an escalating dispute with Germany over austerity vs. jobs, the failure of French President Francois Hollande to fix the country’s economic woes, and increasing immigration hostility. Even the European Commission President Manuel Jose Barroso accused the country of having a negative view of globalization. He also said France had, over the past two decades, lost competitiveness.

France has, in fact, come to look upon its European Union membership as a handicap, not an advantage. A new Pew poll, The New Sick Man of Europe, said that, pre-2007, France’s outlook more closely resembled Germany’s. Now its views are more aligned with those of Spain, Italy, and Greece as some of the most pessimistic in Europe; France now believes being in the EU has undermined its overall economy.

So the French are not only beset by a pall of Gallic gloom when asked about future prospects, but are increasingly unsupportive of remaining in the Eurozone. It may not be just a matter of sentiment; attitudes are leading to action as rising concern over unemployment and toughening economic conditions spur hostility toward immigrants and give a boost to far-right party leader Martine Le Pen of the Nationalist Front (FN), who polled well ahead of Hollande—although still behind former President Nicolas Sarkozy—on May Day. FN espouses a departure from the euro and anti-immigration policies.

As exports have fallen, forcing up the trade deficit, manufacturing slowdowns have brought more job losses. Services and the retail sector also fell, shedding jobs on the way down. In Q1 the country entered its second recession in four years, and younger people—whose unemployment rate, at 27% for those under 35, is more than double that of the general population—are looking for jobs in other countries. They might as well; two-thirds of France’s unemployed have been seeking work for more than a year.

This is despite Hollande’s efforts to put people back to work via subsidies to companies that hire those between the ages of 16–25 for at least a year, and despite so-called “generation contracts” that provide even higher subsidies to companies hiring young people while keeping on those over 57—so that older workers can pass on their knowledge and skills to the young.

Jobs are vanishing anyway. In a banking sector desperate for growth, Société Générale announced it would continue cost-cutting measures by slashing another 1,000 jobs. Alcatel-Lucent and Goodyear Tire & Rubber have also cut staff; IBM has said it will follow, shedding 1,200 over the next two years. Peugeot has been fighting with a striking union over the closure of an auto plant and plans to cut 11,200 jobs in the country.

In pharmaceuticals, the government has leaned on Sanofi to keep it from closing its site in Toulouse; hundreds have already been let go as patents expire and the firm sought to incorporate its 2011 acquisition of Genzyme. However, the public sector is probably the single largest source of cuts in the quest to reduce costs; 34,000 are expected to join the unemployment lines by 2019—hardly cheery news.

Hollande was elected in a sound rejection of Sarkozy’s austerity measures, and France has become more outspoken against Germany’s hard-line insistence on tough economic measures. That has degenerated into an outright attack on German Chancellor Angela Merkel in a draft paper, accusing her of causing the eurozone crisis by acting in her own political interest and her country’s national interest instead of as a member of the EU.

The policy paper, written by Hollande’s Socialist Party in advance of a June conference, calls for an end to austerity as it paints Merkel as the “chancellor of austerity” and says the EU is being dominated by a right-wing Anglo-German team that pursues free trade outside the EU but austerity within.

Germany has, in fact, shifted much trade away from the EU and from France; it now does much more business with China and the BRICS. In the first three quarters of 2012, Germany’s EU trade only totaled 37%; in 1999, more than 45% came from the EU. India and China together account for some 10% of Germany’s exports.

As France increasingly turns its back on German strategies, choosing instead to focus on jobs in an attempt to escape what its finance minister, Pierre Moscovici, calls “adjustment fatigue” on austerity, it has also called for a full banking union within Europe—something Germany has strenuously resisted.

While many hoped that a focus on jobs could reverse the current economic trend, that may not be likely. Although the French government had predicted only 0.1% growth in 2013, Hollande says now he expects zero growth this year. That may be too ambitious; in Q1 the French economy shrank by 0.2%.

Chris Williamson, chief economist at Markit, predicts more trouble. That 0.2% drop, he says, “would have been even larger had it not been for a 0.3% increase in public sector consumption.” With that drop, he says, the country’s economy “remains 0.8% smaller than its pre-crisis peak.”

If that isn’t bad enough, he adds, “The PMI and INSEE business surveys also suggest the underlying health of the economy is worse than even these disappointing GDP figures are currently indicating. Further weakness may therefore lie ahead. The PMI surveys remained firmly in contraction territory in April, pointing to a weak start of the second quarter and raising the possibility of a third successive quarterly GDP decline.”

Despite the fact that France has done better than Italy and Spain, “whose economies remain some 8.6% and 6.9% smaller than before the crisis struck,” it’s still not good. In fact, in one aspect, France has now outdone Greece: its manufacturing sector’s output “is some 19% below its pre-crisis peak,” said Williamson, “up just 4% since the low reached in 2009,” resulting in a “manufacturing PMI for France [that] is now the weakest of all countries surveyed by Markit, recently displacing Greece at the foot of the PMI rankings.”

“Poor competitiveness” in the manufacturing sector, as well as a sharply contracting service sector and gloomy consumers beset by worries over unemployment and job insecurity, indicate more hard times ahead. Said Williamson, “The IMF sees the French economy contracting 0.1% this year but reviving to grow 0.9% next year. Given the recent flow of disappointing economic data, those forecasts are starting to look too optimistic.”