Euro Zone Crisis

France, the new big worry for euro zone

PUBLISHED : Friday, 22 February, 2013, 11:24am
UPDATED : Saturday, 23 February, 2013, 12:04am


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The European Union releases its latest economic forecasts on Friday with euro zone mainstay France sure to overshoot EU budget targets owing to weak growth.

This will pose a problem for EU policymakers, striving to maintain the momentum of tough economic reforms and austerity measures, react to the problem in France.

The French economy faces a gloomy outlook, going by a closely-watched survey of private business activity, with purchasing managers suggesting a downward spiral sharper than at any time since March 2009.

The French government said this week that it will soon revise down its forecast for growth this year.

And more broadly, the latest feedback implies that the eurozone “is on course to contract for a fourth consecutive quarter in the first three months of the year,” said Markit’s chief economist Chris Williamson.

Economist Jack Kennedy said that the French economy could be heading in the first quarter of this year for its worst performance in four years - putting the focus ever more squarely on budgetary sums delivered by Paris to Brussels.

European Commission forecast, due out at 1000 GMT on Friday, will show how far off the pace France and other countries are when it comes to an obligation to get public deficits back within the nominal EU limit of three per cent of gross domestic product (GDP) this year.

States that fall short expose themselves to financial sanctions under tougher laws concerning economic governance across the single EU market of half a billion consumers and 17-state euro currency area.

Within the euro zone, only Belgium, Italy, Austria and the Netherlands appear to be on the right track, said Amsterdam-based Carsten Brzeski of ING Bank in a note to investors.

Since Socialist Francois Hollande took the French presidency last year, France had consistently maintained it would meet Brussels public spending targets despite flagging economic confidence.

However, last week Paris admitted it will not meet the three-per cent EU threshold and that GDP growth this year will be less than the previously-stated objective of 0.8 per cent.

French media said late on Thursday that the Commission now anticipates the deficit extending to 3.6 per cent of GDP - which leaves Paris looking for leeway to get back on track, like Spain and others in receipt of bailout aid before it.

The EU Economy and Euro Commissioner Olli Rehn has repeatedly taken the view that if wider economic constraints mean forecasts slide, countries can win breathing space as long as they can be seen to have made unavoidable budgetary cuts.

However, Hollande refused on Wednesday to deepen spending cuts which could push France into falling output, rising deficits and more cutbacks.

Ahead of revised national forecasts due by end March, he said: “On the economic growth plan, France is among countries which are in the least poor position, even if we are far from meeting our objectives.”

Already on Thursday, EU state-aid watchdogs gave six-month temporary approval on Thursday for an 18-billion-euro (HK$184.6 billion) public guarantee to real-estate bank Credit Immobilier de France (CIF).

The Commission said that the guarantee was needed to avert contagion in the French banking system.

France is not alone in seeking leniency from Brussels.

Portugal says it needs an extra year to get its finances back in order, despite euro zone and International Monetary Fund loans, Finance Minister Vitor Gaspar saying a 12-month extension would be “reasonable.”

Spain - where the banks were the beneficiary of an ad hoc bailout designed to spare the government’s blushes after a construction and property bubble burst - now says its last year deficit will be above its 6.3-per cent agreed limit, although analysts feared worse.

Leaders across the EU are concerned about total unemployment of 26 million people.

The EU’s budget has been tweaked to direct billions towards reducing chronic youth unemployment in Spain and Greece.

The Group of 20 major world economies now wants a softer approach to austerity cutbacks.

Street demonstrations and strikes remain a recurrent feature in the EU. About 50,000 people protested in Greece on Wednesday, and the streets of the EU capital in Belgium were also snarled up by 10,000 demonstrators angered by a salary freeze there.