Friday, 3 May 2013

Eurozone risks - France (1)

There's been a real mix of developments in the Eurozone recently. On the positive side, Italy's finally got a government with some credibility, and Ireland is arguably in the early stages of coming out the other side of a severe austerity programme. On the negative side, the banking crisis in Cyprus materialised largely out of the blue, the rescue plans were very badly mishandled, and there are other banking problems on the horizon (Slovenia, for example). And in the middle we have the ongoing uncertainties about Greece, Portugal, and perhaps Spain. The Eurozone remains capable of generating substantial shocks  to global financial markets.

Lurking in the background is perhaps the greatest threat to Eurozone stability and recovery - the structural and cyclical weaknesses of the French economy, and the inability and unwillingness of the current French administration to come to grips with them.

Watch the French 8.00pm news any day of the week - I like TV2's coverage, which is streamed over the Internet, http://www.france2.fr/ - and see the amount, and angle, of coverage given to any proposed redundancies. Job losses are distressing, we all know that, but we also know that employment growth happens because new job creation exceeds old job destruction. The French don't accept that: it's not much of an exaggeration to say that the French world view is that every job has a right to exist in perpetuity, and every incumbent in that job is entitled to stay there.Here's just one illustration of the issues.

Structural fiscal deficit, % of GDP. Source: IMF WEO database
The IMF calculates a measure of the true underlying fiscal position, which it calls the 'structural' balance, and is the cyclically-adjusted fiscal balance, further adjusted for any one-offs. France has been systematically worse than Germany as far back as these series go for the two countries (1991). Even if you accept the IMF's projections that both countries will get their houses in order over the next five years - yeah, right - France is starting from a worse position, and will take longer to get back to balance.

One final illustration: youth unemployment. France's rate of youth unemployment (26.5%, on Eurostat's data), is actually worse than the dire Eurozone average (24%). France doesn't break out racial or ethnic unemployment rates - "we are all equally French in the colour-blind eyes of the French State" is the official line, which is partly admirable and partly deeply convenient - but you can guess that, for the Arab and North African kids in the slum-like banlieues, it must be approaching 100%.

Financial markets at the moment have their concerns about France, though real alarm bells are still a long way off:  the 10 year French government bond trades at only a modest 50 basis points higher yield than its German equivalent. Even so, there are already people who are of the view that, if there is a big road wreck coming in the Eurozone, it could well happen on the autoroute.

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