The Debate: Should France’s economic weakness be a cause for increasing concern in the Eurozone?
YES
Yannick Naud
French economic weakness is not only apparent from its very high unemployment figures and persistent lack of growth. It’s even more striking when you analyse leading indicators like manufacturing purchasing managers’ indices – the worst of all Eurozone countries, except for Greece. France’s manufacturing downturn is accelerating, with both output and new orders contracting at the fastest pace for over three and a half years. This is a direct consequence of France’s lack of economic competitiveness. Gains in external competitiveness in the PIGS nations (Portugal, Ireland, Greece and Spain) have also been associated with larger fiscal adjustment, which is still lacking in France. Worryingly, the country lacks a sense of urgency. If the government continues on its current course, France will slide towards a recession in 2013.
Yannick Naud is portfolio manager at Glendevon King Asset Management.
NO
Nicholas Spiro
While France’s economy is flirting with a recession, its deep and liquid government bond market – a gauge on how risky investors think a country is – is still considered relatively safe. This is relieving pressure on the Hollande government to implement much-needed structural reforms to close the competitiveness gap with Germany. While the government’s recent labour reforms are a step in the right direction, they will still be insufficient to boost job creation and put an end to France’s dual labour market. The weakness of the economy undermines France’s fiscal credibility, making it even more difficult to carry out structural reforms. But France is unlikely to suffer a run on its bond market, even though its sickly economy remains a source of concern for investors. Benchmark yields currently stand at 2.3 per cent, which is a sign that it’s not all doom and gloom for the country.
Nicholas Spiro is managing director of Spiro Sovereign Strategy.