Concern Over French Economy

Gloomy skies over Paris. Photograph: Youness Bouzinab

Gloomy skies over Paris. Photograph: Youness Bouzinab

Financial observers in Germany are increasingly turning their attention to the economic woes of France. After a string of European countries reported disappointing data last week, the economic situation of the euro zone’s second largest economy has been put in the spotlight. France’s slowdown stood out because its extent came as a surprise to many, and is here in Germany raising the question of what further steps will be needed to preserve the stability of the euro zone.

A future writedown of Greek debt may already be in the works after a comfortable victory in the Bundestag for German Chancellor Angela Merkel, whose proposed aid package for Greece passed with 473 votes to 100, although 23 members of Ms Merkels’s own coalition voted against the deal. An article published yesterday in the right-leaning Frankfurter Allgemeine Zeitung spoke of “three beautiful days for Angela Merkel” and of her increasingly “unchallenged” status at home. Yet the multiplication of such aid deals and a growing awareness of the vulnerability of Germany’s own economy means Merkel is unlikely to exert leverage in future parliamentary debates in support of further relief to other ailing European economies.

For that reason, the deterioration in France is becoming an ever greater source of concern. Across the Rhine, France’s economic struggles are seen as stemming from a lack of initiative in promoting and enacting widespread structural reform. French president François Hollande is considered to have shown little initiative in opening up and liberalising the job market. Moreover, were he to promote such policies, it is far from certain that these could be pushed through parliament and written into law: although the French left controls the majority of seats in both the upper and lower chambers, and the main opposition party (UMP) is embroiled in a violently contested leadership battle, the public’s and Mr Hollande’s own party’s aversion to liberal reform form a major obstacle to change.

The divide between the French and German responses to the crisis is wide, and the difference between the state of both economies accordingly stark. For the first time since its reunification, Germany now counts fewer unemployed than France.

In Europe at large, the unemployment rate has reached a record 11.7%. France does remain at a far lower rate than Spain or Greece, at 26.2% and 25.4% respectively, but journalists and economists here are quick to point to a startling increase in the unemployed over the past few months.

Despite an increase of 120,000 government-subsidised contracts since Mr Hollande’s arrival in May of this year, an additional 335,000 people were registered as unemployed over the first three quarters of 2012. This far exceeds the increases recorded in 2010 and 2011, and more than doubles the rate anticipated by UNEDIC, an independent French employment agency.

From a German standpoint, the causes of this downward slope are three-fold:
1) Overly rigid labour laws that deter job creation
2) Lack of a strong and far-reaching network of small and medium-sized businesses
3) Insufficiently bold moves to reduce the deficit and bring the overall debt down to a manageable level

France and Germany’s economies are tightly linked, even by EU standards. Franco-German collaborative enterprises such as Areva and Aventis, and others which both states partly own, such as the European Space Agency and Airbus, are among the most succesful in either country. It comes as no surprise that the shortcomings of the former’s economy could, therefore, have disastrous consequences on Germany and the euro zone recovery strategy it is promoting.

The consequences of the slowing down of the euro zone economy, and especially France’s, on Germany can already be felt.

Consumer spending in France fell 0.2% in October. That same month, retail sales in Germany dropped by 0.8%. Albeit a more volatile data set than unemployment rate, these figures caught many analysts by surprise and further confirmed Germany’s vulnerability to its neighbour’s difficulties.

A recent three-part blog post by Christoph Rottwilm, editor of manager-magazin.de, is symptomatic of a growing German unease with the state of the French economy. The euro zone cannot depend solely on the vigour of Germany’s finances and industry and it is clear to all here that a healthy French economy is necessary to insure a relative stability in the euro zone and weather this latest storm.

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