Incremental French reform steps

December 12, 2014

French Prime Minister Valls and Economy Minister Macron leave a press conference to present the "Law on Growth and Activity" plans at the Elysee Palace in Paris

French Prime Minister Manuel Valls meets ministers to discuss the next leg of the government’s reform agenda. Documents will be published afterwards.

Measures this week, which looked modest to the outside world, involved allowing shops to open more often on Sundays, resolving disputes over firings more rapidly, deregulating the legal trade and cutting red tape for construction.

Even so, they ran into opposition from the left-wing of the ruling Socialist party although polls show the public are broadly in support despite delivering Francois Hollande the worst popularity ratings for any president in polling history.

Valls and similarly reform-minded Economy Minister Emmanuel Macron are at the forefront of this effort, promising reforms to raise the economy’s growth potential and buy it time to get its budget deficit back under wraps. Brussels and Berlin would like to see more radical steps, particularly in the area of labour market deregulation.

EU Economic Affairs Commissioner Pierre Moscovici meets Italian Prime Minister Matteo Renzi at a sensitive time.

We know the European Commission thinks France and Italy are breaking EU deficit rules but will defer decisions on any action until early March. At that point, France could face a multi-billion euro fine and Italy be put on a disciplinary programme, though seasoned EU watchers expect some sort of deal to be done.

Reforms are extremely hard-won in Italy. Renzi has made some progress in a year when he got strong impetus from his EU election victory and held the EU presidency in the second half of the year. There are reasons to think the going will get tougher, not easier, hereon.

It’s a big credit ratings day: S&P will opine on Britain and Bulgaria, both S&P and Fitch will run the rule over South Africa’s rating while Moody’s will have a look under Romania’s bonnet.

South Africa might be the most interesting with its markets bracing for a downgrade. Moody’s cut the rating to Baa2 last month, two notches above junk, while S&P cut back in June.  Economic growth, which averaged 5 percent in the five years before a 2009 recession, has languished below 2 percent since, undermining revenue collection and forcing the government to borrow about 150 billion rand ($13 billion) a year.

Hopes of talks on re-establishing a ceasefire in eastern Ukraine appear to have been dashed with violence unabated. Kiev says it is in serious risk of defaulting unless Western donors come up with more funds on top of the billions of dollars already promised.

The IMF is in Kiev but won’t hand over the next tranche of a bailout package, worth $2.7 billion, until a budget for 2015 is ratified. In the meantime, Ukraine’s reserves are dwindling fast.

Russia is not under threat of default but economically things are getting very uncomfortable. A sharp interest rate rise on Thursday failed to arrest the rouble’s slide – it hit a fresh record low this morning while the stock market is down 3 percent.

The economy is sliding into recession and inflation remains well above the central bank’s target at over 9 percent. Moscow has rejected talk of capital controls so the alternative is for the central bank to continue burning through reserves, keep raising interest rates or let the rouble go.

Norwegian Central Bank Governor Oeystein Olsen and Yngve Slyngstad, head of the Norwegian oil fund, speak a day after Norges Bank unexpectedly cut interest rates to 1.25 percent and said it could ease policy further because lower oil prices are hurting the economy’s growth prospects.

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