France under the spotlight

June 4, 2013

An IMF team will conclude its annual review of the French economy and hold a news conference this morning.

It’s a safe bet that the Fund’s prescription will be similar to that of the EU and most other interested observers – the two extra years France has been given by Brussels to meet its debt-cutting targets must be used to liberalise and reform its economic structures. That was certainly Angela Merkel’s message to President Francois Hollande last week and also implicit in the Franco-German position paper which is intended to lay the ground for an EU summit at the end of the month.

The paper apparently contained a string of concessions from Germany – such as accepting a full-time president of the Eurogroup of euro zone finance ministers and paving the way for the next stage of a European banking union by accepting a “resolution board” to deal with restructuring or winding up failed banks, although that would be based on national authorities not the central body advocated by the European Commission and European Central Bank.

But the real story is what Hollande signed up to in return. The smart money says he promised to deliver on labour and pension reforms which will be tough for his socialist allies to swallow. Without that, France’s gentle economic decline could continue until the Franco-German motor which has traditionally driven the European project, could become solely the German motor.

By apparently giving ground – although how much remains to be seen as EU negotiations continue – Merkel may have given Hollande the political cover to act. His irate response to the European Commission’s policy demands last week showed that more than anything else, he cannot afford to be seen to be bowing to the demands of others.

Spanish unemployment figures bear close watching after Prime Minister Mariano Rajoy blurted out at the weekend that today’s data would be “clearly encouraging”.

This is all relative, of course. With an unemployment rate of 27 percent and a deep recession likely to persist for some time, we are not talking sunlit uplands here but presumably the rate must have fallen. Despite all the problems, countries still want to join the euro zone. The European Commission will on Wednesday give a green light to Latvia’s entry to the euro zone.

The markets have offered a volatile mix since Ben Bernanke posited the possibility that the Federal Reserve could begin to slow its bond-buying programme with new money in the months ahead, so much so that good news has become bad news. By that I mean weak economic data actually pushes stocks higher because it lessens the possibility of central bank stimulus being withdrawn.

That certainly happened yesterday when Wall Street ended up on the day after a markedly weak U.S. manufacturing survey. So we’re peering through the looking glass again.

To prove the point, safe haven German Bund futures have dipped at the open with traders saying Thursday’s European Central Bank meeting, which we will preview today, and Friday’s monthly U.S. jobs report will set the tone for both central banks and the markets. European stocks opened higher.

The emerging market world has borne the brunt again and those countries with domestic problems to boot have really been savaged. Turkish shares plunged by 10 percent at one point yesterday after three days of anti-government rioting. Turkish Prime Minister Tayyip Erdogan didn’t do much to calm the situation, accusing anti-government protesters of walking “arm-in-arm with terrorism”.

South Africa has been another in the firing line with the government struggling to contain serious labour unrest. But there, the rand snapped a 6-day losing streak on Monday, jumping more than two percent against the dollar after the weak U.S. factory data.

A British Retail Consortium May survey, out overnight, showed sales rebounded in May, exceeding their average growth rate over the previous year. There are tentative signs that the UK economy has passed its low point. The economy skirted recession in the first quarter – unlike the euro zone – and a key manufacturing survey on Monday showed the fastest pace of growth in over a year, pushing back into expansionary territory.

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