Skittish investors have been looking at France with a wary eye for some time. Recent election results have only unnerved them further—and that, followed by a contraction in French manufacturing for the first time in three months, has definitely stirred some concern.
France had been lagging behind some other Eurozone nations in recovery, under pressure from such leaders as German Chancellor Angela Merkel to institute stiffer austerity measures to cut its expenses and boost its economy. Its budget deficit had risen from 3.3% of GDP in 2008 to 7.5% in 2009, but the country had managed to beat its way back to a deficit level of 4.1% in 2013. Its goal remains to lower that figure—as indeed it is required to do by EU mandate—but it has remained unwilling to sacrifice its spending on social welfare programs.
Therefore, under President Francois Hollande, instead of tightening its belt to the degree pushed by Germany, the country instead launched several jobs programs. It also raised taxes, including a temporary 75% tax on earners of more than 1 million euros.
Unemployment has remained a thorn in the country’s side, as it has in so many Eurozone countries, and one action Hollande took early this year was the announcement of a “responsibility pact” that offered to provide lower labor taxes (the cost of funding public benefits such as medical care) to businesses that provided jobs.
His promise didn’t cut much weight with the unemployed, who, along with many across Europe, took to the polls in May’s EU elections to protest high unemployment amid a wave of anti-immigrant sentiment. Far-right nationalist parties succeeded to a surprising degree, making advances not just in France, but in numerous other countries.
The rise of far-right parties across Europe could pose a threat to business interests that rely on being able to import workers, both highly skilled and lower level, to whichever country in which they are needed. It is also a threat to those who move from place to place, seeking work. But unemployed workers, in France and elsewhere, see the tide of immigrants as a threat to their own employment situations, as recovery across the Eurozone has not brought back as many jobs as are needed.
The shock of France’s vote upholding Marine Le Pen’s National Front in the election was amplified two days later with the news that UMP, the conservative opposition party, is being investigated for misuse of funding during former President Nicolas Sarkozy’s failed 2012 reelection bid. The head of UMP, Jean-Francois Cope, has stepped down under public pressure and that leaves the door open for a new challenger in the 2017 presidential race—or for Le Pen to further advance.
Sarkozy has been hoping to make a comeback in 2017, but the scandal could prevent that. The former president’s views on the French economy and immigration are considerably to the right of Hollande, but Sarkozy was turned out of office after a single term.
Another somber shade in France’s economic picture was the latest purchasing managers’ index (PMI), which indicated that manufacturing slowed for the first time since February on falling orders while unemployment rose. The slowdown in orders was both domestic and foreign, and dragged down the Eurozone overall, although Chris Williamson, chief economist at Markit Economics in London, said that performance in other Eurozone countries such as Spain and Italy was “encouragingly strong.” That could leave the door open to improvement in foreign orders for France down the road.
BNP Paribas has not helped the situation, facing as it does a possible $10 billion fine, or perhaps even more, imposed by the U.S. for the bank’s evasion of sanctions on Sudan, Iran and Syria from 2002–2009. While at first the French government held itself apart from the negotiations between the bank and U.S. authorities, as talk solidified around the amount of the fine, officials began to weigh in, calling the amount “unreasonable” and saying that it could affect trade negotiations between the two countries.
BNP had only set aside $1.1 billion for fines. As a result, the possible $10 billion fine could actually affect the bank’s ability to meet capital requirements ahead of European stress tests, and force it to restrict dividends, perhaps for as long as two years. In addition, the bank could lose its ability to function within the U.S., or could be subject to penalties including temporary suspension of dollar clearing through New York.
But the picture is not all bleak, as other sectors show promise. Wind power may be about to speed up growth with the end of uncertainty surrounding tariffs on wind power feed-in. The EU’s highest court has overturned the original tariff decree, and a new one is already approved to replace it, bringing stability to the market. That is expected to stimulate growth in the sector as soon as Q4. In addition, a new regulation designed to reduce red tape is also expected to help the sector beginning in 2015.
Viadeo, a tech startup, announced at the end of May plans to test the IPO waters in Paris, the first large tech company to do so since 2006. Other French startups, such as Criteo, have chosen to list in New York rather than at home, capitalizing on the tendency there toward greater valuations because of investors’ greater familiarity with tech startups.
However, Viadeo, which competes with LinkedIn and Germany’s Xing, is the largest online job search network for workers in France and China, as well as Russia and French-speaking Africa. Its user base has grown to 60 million since its 2004 founding. Most of its revenues currently come from France, with 9 million members, whereas China revenues are small but growing from a base of 20 million subscribers.
Last and far from least, France has also signed $25 billion worth of trade deals with China during a state visit by Chinese President Xi Jinping. Agreements range from Airbus plane orders to a $1.1 billion investment with PSA Peugeot Citroen, France’s largest auto maker.