France: More like Italy than Germany?

February 17, 2012

In the more than two years that have passed since the start of Europe’s financial crisis, France has consistently aligned itself with Germany in pushing for greater austerity in so-called “peripheral countries” like Greece, Portugal, Spain and Italy. German Chancellor Angela Merkel even took the rare and somewhat awkward step of publicly campaigning for French President Nicolas Sarkozy.

But a closer look at the country’s debt profile suggests France may be misjudging its own underlying financial conditions. Even beyond French banks’ considerable exposure to southern European sovereign bonds, analysts say the economic backdrop is remarkably similar to nations that have run into trouble.

Writes Christoph Weil of Commerzbank in a research note:

France has the same problems as the euro periphery. The French economy is struggling with a massive loss of competitiveness and rising unemployment, while the consolidation of government finances is progressing at a sluggish pace.  [...]

The French government has financed spending via ever-higher borrowing. In the 9 years since 2002, the French finance minister has exceeded the deficit limits of the Maastricht Treaty on 6 occasions. As a result, France is now deeply in the red. While sovereign debt was under the 60% of GDP threshold at the beginning of monetary union, it had risen to 85% by the end of 2011.

Oh la la. Or should we say, mamma mia?

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If France is like Italy, then Britain and the US are like Greece!

Just a few figures for those who are desperately trying to spread the contagion to France (how many French CDSs has Commerzbank bought recently? That’d be interesting to disclose):

French GDP growth in 2011: 1.7%. That’s almost DOUBLE that in the UK (0.9%), even though Britain is benefiting from a competitive devaluation of the pound. France has actually recovered all of the lost GDP since the pre-crisis peak. Italy, by comparison, grew only 0.4% in 2011.

France has also beaten its deficit reduction targets: budget deficit will be at 5.4% in 2011, compared to a previous forecast of 5.7%. Of course, that’s WAY below the UK budget deficit at 8% and also below the US deficit.

As to overall debt, French debt of 85% is comparable to Britain’s 83% (British public debt grew much faster since the financial crisis started and will overtake France’s next year), and is also much below US debt, which has hit 100% of GDP this year, not a far cry from Italy’s 120%.

And yes, German growth was higher in 2011. But nobody seems to remember than in 2009, when German GDP was freefalling at -5%, France’s recession was only a mild 2%.

So please, if you pretend to have “a closer look” at France’s debt profile, try and be a bit more complete in your assessment, and not just superficially brush on an issue. This is Reuters, not the New York Post.

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