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04/12/2016

France seen as weakest eurozone economic performer

Euro & Finance

France seen as weakest eurozone economic performer

Homeless in Paris. Gare du Nord, September 2012. [Joel Schalit]

France, the eurozone’s second biggest economy, appeared as the weakest performer in European Commission economic forecasts published on Tuesday (4 October), with below average economic growth, falling investment and deteriorating public finances and competitiveness.

Economic growth in the third biggest economy, Italy, emerging from recession, would be even slower over the next two years than in France, the Commission forecast, but it would invest more, cut its budget deficit and debt and keep a current account surplus.

Both countries clashed with the European Union’s executive arm last month when they sent in for approval their draft 2015 budget plans that fell well short of their consolidation obligations under EU budget rules.

To avoid the political humiliation of an outright rejection of the drafts by the Commission, both Paris and Rome agreed to small changes in the plans, but the promised adjustments came too late to be included in the forecast on Tuesday.

Rather than fall, like virtually everywhere else in the eurozone, the French headline budget deficit is to grow steadily to 4.7% of gross domestic product in 2016 from 4.1% in 2013, the Commission forecast.

The only other country where the deficit is expected grow in this period is Luxembourg, but there the shortfall will be only 0.4-0.6% and come after years of surpluses.

France has a deadline for next year to bring the deficit down to below 3%, but has already said it would not make it until 2017, setting itself up for tougher disciplinary EU action, which might include fines for missing deadlines.

In structural terms, which strip out the effects of the business cycle and one-off revenues and spending, the French deficit is to be 3.0% this year, 2.9% in 2015 and jump up again to 3.4% in 2016, unless action is taken, the Commission said.

This is also against EU rules, which require a government to cut its structural deficit by at least 0.5% of GDP every year until it reaches balance or surplus.

The Commission expects Italy to keep its headline deficit below the EU ceiling of 3% of GDP next year and reduce it to 2.2% in 2016.

But structurally the consolidation will also be much smaller than it should be — Rome is to bring the structural deficit down to 0.8% next year from 0.9% in 2014 and it is to rise again to 1.0% in 2016 unless action is taken.

Both France and Italy have argued that a more forceful consolidation of public finances would hit their already weak growth rates — the Commission projects that the French economy would grow only 0.3% in 2014, 0.7% in 2015 and 1.5%t in 2016.

Italy is to expand 0.6% next year after three straight years of a recession and then accelerate to 1.1% in 2016, the Commission said.

This contrasts with the rude health of the biggest economy Germany, which is to grow 1.3% this year, 1.1% in 2015 and 1.8% in 2016.

But at least Italian investment levels will rise 1.4% next year and 3.1% in 2016, while French investment will continue to fall in 2015 by 1.2% before rebounding 3.5% in 2016. German investment is to rise 2.9% this year, 2.0% in 2015 and 3.9% in 2016.

In terms of its current account balance, which gives some idea of how competitive a country’s products are on the global market, France is to record deficits of 1.9% of GDP this year and next, increasing to 2.2% in 2016.

Italy by contrast can expect a current account surplus of 1.5% this year and next, rising to 1.8% in 2016, while Europe’s export powerhouse Germany will see surpluses of 7.1% this year and next and 6.7% in 2016.