Is France’s Economy a Surprise Threat to Eurozone?

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.