31.01.2012

By Simon Miller

France is one of the power houses of Europe along with Germany and the United Kingdom. Unlike many countries, France managed to weather the global economic crisis better than other big EU countries due to the
relative resilience of domestic consumer spending, a large public sector and less exposure to the downturn in global demand.

However, it is precisely these factors that not only threaten to push France into recession but also threaten President Nicolas Sarkozy’s election chances.

Economy
Its gross GDP stood at $194.1bn (£124.6bn) in 2010 but despite its recent solidity, France still saw its GDP fall 2.5 per cent in 2009 before a slight recovery in 2010.

However, with the unresolved European sovereign-debt crisis, France may enter a short shallow recession with GDP projected to grow by just 0.3 per cent in 2012 before accelerating to around 1.5 per cent in 2013, according to the OECD while the National Institute of Statistics and Economics predicted that the GPD contracted by 0.2 per cent in the fourth quarter of 2011 and by 0.1 per cent in the first quarter of 2012.

The Institute also shows that business confidence In France’s manufacturing sector has dropped two points to 94 over the pervious and predicted a forecasted recession across the entire eurozone resulting in demand for French exports to fall from 0.9 per cent to zero.

With the pressures on the eurozone, unemployment is projected to increase to 10.4 per cent by the end of this year from 9.3 per cent in 2011 while the economic downturn would allow inflation to fall to around 1 per cent in 2013.

Debt
The key issue for France is its debt problems. At 5.7 per cent of economic output, its deficit is wider than any other eurozone country aside from Greece, Ireland and Spain. Despite its stability, the very pension system and labour market that allowed France to offset the global downturn is now coming back to haunt it with its debt to GDP projected to peak at around 92 per cent from 2011’s 85.4 per cent. With its ties to the euro, France does not have the potential to monetise debt like the US and UK and so is at greater risk of having its precious AAA rating downgraded.

Although the government has announced a €65bn (£54.2bn) five year plan to reduce the deficit, agencies warned that it was equivalent to around 1 per cent of GDP and that further measures would be required to cut the deficit to 3 per cent of GDP by 2013.

In addition, French banks have over €600bn in exposure to Italian, Spanish and Greek debt according to the Bank for International Settlements. This exposure is affecting French banks’ abilities to get funding worldwide. In December, French banks saw a loss of more than €120bn of funding in the short-term wholesale market from the US and the duration of the funding plummeted from an average 44 days to less than five. Indeed it is rumoured that the actions by central banks to supply cheaper overnight funding to banks in December was a direct result of a French bank almost going bust overnight.

Elections and Europe
However, actions will be difficult for Sarkozy in this an election year. With the right skimming votes away from him, and the Socialist Party promising to review France’s relationship with Europe, Sarkozy can ill-afford to push further public sector cuts onto France this year and is dependent on a deal being done in Europe to prevent contagion or a downgrading of France’s economic rating.

If there is no deal, France could become the greatest casualty yet of the European sovereign debt crisis and could lead to France not only bringing down the euro-project but also the global economy.