Is France going the way of Italy?
Sep 28, 2012
Many investors are worrying that “France is the next Italy”, says James Mackintosh in the FT. Like Italy, it has become a lot less competitive under the single currency and “has done nothing about it since the crisis began”. That in turn makes it less likely that over the long term France can grow rapidly enough to keep its overall debt pile under control, which is currently Italy’s main problem.
France’s public debt is worth almost 90% of GDP. That’s not as bad as its neighbours’, but the figure is mounting quickly: France has not balanced its annual budget since 1974.
The government is trying to lower its annual overspend (the deficit) from last year’s 5.2% of GDP to 3% next year and zero in 2017. Few are convinced it can stick to this plan. Around €10bn of spending cuts and €20bn of tax hikes have been pencilled in for next year, but this seems unlikely to be enough, as growth is set to disappoint. The latest indicators suggest that France is sliding into recession.
As far as competitiveness is concerned, the outlook is more encouraging, says The Economist. President François Hollande has called for a reform of France’s inflexible labour market and wants union leaders and bosses to hammer out some changes – which is how Germany became more competitive in the 2000s – by December.
If they can’t, he says he’ll pass a labour reform law anyway. Time will tell, but given that the president is at the start of a five-year term and his party controls “power at all levels across France… if he cannot do what is needed this autumn, it is unlikely that he ever will”.
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