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The eurozone crisis: Next stop France

Monday 25 February 2013

What became clear reading Friday's European Commission winter economic forecasts was how much the eurozone's crisis has (i) shifted from a existential threat to a deeper problem of lack of economic growth and (ii) how problems have seeped from the eurozone's periphery to its core.


Just look at these snippets from the forecasts of individual member states:


“Economic activity has stagnated in 2012. 2013 [will be characterised by]... a still decreasing household real-disposable income linked in particular to rising unemployment and to unfavourable entrepreneurs' confidence... despite the ongoing efforts to reform the labour market, unemployment is thus expected to continue rising... GDP growth projected well below potential will negatively affect the headline deficit ... [which is expected to be] well above this year's official target.”




“Net exports which had previously been supporting growth in the previous five quarters turned strongly negative, while domestic demand continued to decline. Real GDP continued to decrease in the fourth quarter of 2012, with private consumption falling for the eighth quarter in a row, to a level last reached in 2003... Consumer confidence remains close to historical lows.”


Asked to guess which countries the Commission's economists were writing about in these summaries and - while you might judge that they don't sound quite bad enough to be Greece - it might come as some surprise when told they refer to France and the Netherlands.


Now, there are some less pessimistic forecasts contained in the reports for those countries but they do demonstrate that the euro's problems are far from over. The days of hastily arranged emergency summits aimed at putting out fires are behind us, at least for now, but there are now major questions about the region's competitiveness and capabilities in restoring growth and unemployment in some of its biggest countries.


France's likely deficit-target over-run is the greatest concern. It goes to the heart of how strictly fiscal rules should be applied in eurozone 2.0.


Jean Pisani-Ferry, the director of the Brussels-based thinktank Bruegel, wrote in an article on Thursday, that the Commission needed to be tough on France. “The Commission should request from Paris a serious plan for public spending cuts in the years to come,” he wrote.


“The French 2013 adjustment was mostly based on tax increases. The government has announced that further consolidations would come from public spending cuts and it has pencilled in €60bn of those.


“This is, however, a rather weak commitment because President François Hollande has not spelt out precise priorities, let alone targets. So the commission should condition flexibility for 2013 on a decision by Paris on the targets, timetable and process for a comprehensive public spending review. It is not enough to say that some government spending will be cut. France must say which and when."


The Baltic states are performing best according to the economic reports. I pored over all the forecasts on Friday. You can read a full summary in this week's edition of European Voice, out on Thursday.




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