Weak French Economy Threatens Anxious Eurozone

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Fears that the socialist policies of French President François Hollande would make a weak French economy worse appear now to have been well-founded.

France announced Thursday that growth for the third quarter was a mere 0.2%. The French economy shrank 0.1% in the previous quarter, and most economists expect that contraction to resume in the current quarter.

Meanwhile, unemployment has risen to 10.2%, its highest level in 13 years.

Since Hollande won the French presidential elections in May, he has increased the minimum wage, lowered the retirement age for some workers (which his predecessor has just raised in an attempt to reduce government costs), created tens of thousands of education jobs and, of course, announced big tax increases.

But instead of reviving the weak French economy as Hollande promised, all indications are that his policies are making a French recession in 2013 more likely.

"The third quarter is probably the result of a temporary rebound at the European level," Michel Martinez, an economist at Societe Generale in Paris told Bloomberg News. He added that business sentiment indicates France's "economy is heading to a moderate recession or at best remaining flat."

French Economy Hints at Recession

A French recession would be disastrous for a Europe still seeking answers to the Eurozone debt crisis that has plagued the region for several years, as France is its second-largest economy.

And Europe's struggles will put still more stress on the U.S. economy, a possibility that has had Wall Street on edge for months.

French business leaders are so worried that on Oct. 28 a group of 98 CEOs released an open letter to Hollande warning him that the country's outsized public sector spending – 56% of the French gross national product (GDP) – is "no longer supportable."

CEOs say that high government taxes cost companies twice the take-home pay of their employees, biting deeply into profitability. Operating margins at French companies are down 40% over the past 10 years.

And many companies have put expansion plans on hold in anticipation of weaker demand from a Hollande- created recession.

The French public isn't happy, either. Hollande's job performance numbers have plummeted from 62% in May to 38%.

"The biggest problem at the moment in the Eurozone is no longer Greece, Spain or Italy, instead it is France, because it has not undertaken anything in order to truly re-establish its competitiveness, and is even heading in the opposite direction," Lars Feld, an economist who sits on a German government advisory panel, told Reuters.

Weak French Economy No Surprise Here

While other investors may be alarmed at the developments in France, Money Morning readers knew months ago that the country was headed for trouble.

Several prescient columns just prior to the French election by Martin Hutchinson, Money Morning's Global Investing Strategist and editor of Permanent Wealth Investor, gave Money Morning readers plenty of advance warning.

"The real tottering European domino to worry about is France," Hutchinson wrote on April 18.

In the event of a Hollande victory, he predicted, "the commitment to government austerity is just not there. In the current nervous state of the markets, France's budget deficit could become impossible to finance."

But Hutchinson didn't stop there. He also said that France's continued massive government spending and weak economy make it a very real candidate for a bailout – except the French economy is far too big for a bailout.

"Unlike Greece, if France gets into serious trouble, the remaining "solid' euro economies led by Germany are not big enough to save it," Hutchinson wrote in a follow-up article in May.
Instead, Hutchinson said, France's financial woes could be what causes the collapse of the euro, rather than the problems facing Greece, Italy and Spain.

To find out more about Martin Hutchinson's insights into global investing, click here.

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  1. BILL | November 17, 2012

    I THINK WE JUST CANCEL OUT ALL DEBT AND START OVER, ELSE WE ARE ALL SCREWED

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