Alarm bells 'ringing for France'
Brussels, November 15, 2011
France's inability to make rapid adjustments to its economy is a serious concern and should be ringing alarm bells for the euro zone, according to a study examining the health of the euro 17 countries.
The report by the Lisbon Council ranked France 13th out of 17 for its overall health, including its growth potential, employment rate and consumption, and 15th for its progress on economic adjustments, particularly on reducing its budget deficit and keeping a lid on unit labour costs.
The report will fuel concerns that France risks going the same way as Italy, Spain, Greece, Ireland and Portugal, all of whom have faced intense financial market pressure and seen their borrowing costs soar to unsustainable levels.
The yield on French 10-year government bonds rose to 3.46 percent on Monday, a spread of 163 basis points over benchmark German Bunds -- a near record in the lifetime of the euro.
"Among the six euro zone countries with a AAA rating, France achieves by far the lowest ranking in the study's fundamental health check," the Brussels-based think-tank found in the 75-page report, called the Euro Plus Monitor.
"The results are too mediocre for a country that wants to safeguard its place in the top league... Alarm bells should be ringing for France."
France ranked just above Italy, Portugal and Greece and below Spain in its overall health check, with competitiveness and fiscal sustainability both significant problems. It ranked the worst in the euro zone for total government outlays.
When it comes to its ability to adjust, France ranked below Belgium and had only Germany and Austria beneath it. But the report pointed out that Germany and Austria had already made the adjustments they needed to make, whereas France had not.
"Countries in rude fundamental health such as Germany have little need to adjust. But for a country with significant health problems such as France, the lack of adjustment is a concern," the report said.
"In most criteria used to rate progress in the Euro Plus Monitor, France finds itself with scores closer to Spain and Italy than to other AAA-rated European countries like Germany, Austria and the Netherlands."
If France were to lose its triple-A rating -- credit ratings group Standard & Poor's last week accidentally released a report saying the rating had been lowered, only to correct itself hours later -- it could have profound repercussions.
Not only would it severely dent market sentiment towards France and therefore the country's ability to finance itself, but it would endanger the credit rating of the euro zone's bailout fund, the EFSF, which relies for its stability on having six triple-A countries underpinning it.
The report underlined concerns that the steps France needs to take to get its economy in shape would not be taken before presidential elections next year, the first round of which is set for April 22.
"France needs to rein in government consumption, improve education prospects, especially for its immigrant population, and make better use of its well-talented workforce.
"Whoever wins the next election, chances are the post-election administration will have no choice but to either adopt unpopular reforms immediately -- or adopt them with a vengeance a little later after further serious slippage in the French performance relative to Germany."
The Euro Monitor Plus ranked Estonia top of both its health check and adjustment progress indicators. - Reuters