Photo: Mary Margret on Flickr
Markets have held the French elections in focus lately.The outcome of the political battle between right-of-centre incumbent Nicolas Sarkozy and Socialist Francois Hollande could dictate the future of euro crisis support.
At the same time, France faces significant economic hurdles of its own, which are being compounded by the crisis.
As it stands, France’s banks have high exposure to Italian sovereign debt and the French government has no access to European Central Bank resources to stem borrowing costs.
Although France is generally regarded as one of Europe’s stronger economies, the loss of its AAA rating would be devastating to European efforts to build a firewall that would prevent contagion from spreading through the EU banking system.
In 10 years, France's exports have fallen from 55% of Germany's exports to barely 40%. Further, its share of euro area total exports has fallen by 1.2 per cent since 1999, or 1.8 per cent of GDP.
labour productivity has fallen three times in the last four years.
Source: The Economist and Societe Generale
French public debt is about to hit 89% of GDP this year. That's an increase from 85.8 per cent of GDP in 2011.
Source: Societe Generale
France passed its last balanced budget in 1974.
While Societe Generale believes France is likely to hit deficit targets for 2012 and 2013, this won't come without sacrifice:
As far as 2013 is concerned, we believe that a major adjustment effort worth 0.8pp of GDP over and above that already planned will have to be made. It is achievable, however, and being comparable to the austerity administered in the 2011 and 2012 Budget Bills. First of all, we note the impact of measures voted in 2010 and 2011 and whose effects will start to be felt in 2012 and 2013. Amounting to more than €4.1 bn in 2013, they include the de-indexation of income tax bands and the introduction of the new financial transactions tax. Taking account of such measures, and based on official GDP growth forecasts, the government estimates that it will need to raise another €3 bn in receipts and cut a further €1.5 bn from its expenditure.
Source: Der Spiegel and Societe Generale
High costs of employing workers makes doing business expensive — particularly in comparison to neighbouring Germany.
A low employment rate (64.3%) despite reasonable unemployment rates (10.0%) demonstrates problems in the labour market.
Italian borrowers owe French banks some $366 billion. That's on top of the $53.9 billion Greek borrowers of them.
With Italy under fire and PM Mario Monti aching to get his country's debt under control, the possibility that French banks might have to write down some of their Italian assets is looking increasingly likely.
Source: New York Times
According to Societe Generale:
The French consumption driven growth model has reached its limit. Since 2000, about 15% of household disposable growth stemmed from tax cuts and increases in transfer payments. The problem French households now face is the diet of fiscal austerity cutting off this previous source of income growth. Moreover, consumption and housing were also boosted by a rise in indebtedness (from 52% to 81% of household disposable income over the same period). Even if French households are much less indebted than in other advanced countries, future credit growth will be more moderate.
A victory by Socialist challenger and front-runner Francois Hollande in May's presidential elections could compromise pan-European crisis efforts.
Hollande has campaigned on promises to renegotiate the latest European treaty on a fiscal compact that would impose automatic sanctions on countries that did not meet deficit targets. He would also rewrite the mandate of the European Central Bank, and has advocated eurobonds.
These are not bad policies necessarily, but support for them could jeopardize the French-German-led unity that has been responsible for enacting crisis measures so far.
Sarkozy and German Chancellor Angela Merkel have already ruled out European Central Bank help in recapitalizing European banks. If French banks cannot raise money to meet the required 9% core 1 capital to liabilities ratio, they will have to call upon the French government.
This would probably put further strain on France's already significant debt burden, as the country will probably not be able to access more funding from the eurozone rescue funds, the European Financial Stability Facility and the European Stability Mechanism.
S&P has already downgraded France, and rumours of a downgrade from Moody's or Fitch have repeatedly upset markets.
Last week, unfounded rumours about a possible French downgrade provoked a jump in yields on French government bonds. Such worries have been ongoing since last fall, but a cut from Standard & Poor's in January has raised the stakes on a downgrade.
A Citi research report last Wednesday opined that Moody's ratings service would put France's AAA-rating 'on review for a possible downgrade by the autumn.'
Source: Wall Street Journal
The French government's AAA rating is closely tied with its obligations to banks and the EFSF. Bigger obligations to either organisation could put it in jeopardy.
France is responsible for 20.4% of funds available to the EFSF. If downgraded, the rating of that contribution will also fall, vastly reducing the EFSF's capacity to insure debt and lend money.
That could completely derail EU leaders' plans to prevent contagion from spreading throughout the eurozone.
France's borrowing costs are under control at 3.1 per cent, but elections are spooking investors. The prospect of losing Franco-German unity on one hand and surprising support for the euro-sceptic right winger Marine le Pen suggest that trouble could be underfoot.
Xenophobia has heightened tensions between immigrant and ethnic populations and the longstanding 'French.'.
Tensions came to a head earlier this month when terrorist attacks by Mohamed Merah, a young Muslim of French birth but Algerian descent, shot seven people in a two-week killing spree. While authorities have blamed the attacks on mental problems and delusions, the killings nonetheless highlighted French angst with the steady stream of generally Muslim immigrants.
This xenophobia could explain record support for right-wing French presidential candidate Marine Le Pen, who advocates nationalist policies and supports limiting immigrants to 10,000 per year. Le Pen has called Islam 'intolerant.' She also advocates leaving the euro.
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