France is in worse shape than it seems

Less than 12 hours after taking office, President François Hollande, France's first Socialist leader in 17 years, headed to Berlin and his first meeting with conservative German Chancellor Angela Merkel. His plane was struck by lightning, perhaps an indication of what lies ahead. It is bound to become a familiar journey, as the leaders of the euro zone's two largest economies grapple with the intertwined problems of what to do about Greece and how to hold the currency union together. After their initial meeting, Mr. Hollande restated his commitment to redirecting Europe toward growth policies and away from more economy-choking austerity.

It is important to note that Mr. Hollande is still in full campaign mode, trying to win a majority in next month's parliamentary elections. Bashing austerity plays well with voters in the midst of a slump, as a handful of radical Greek parties and Mr. Hollande himself can attest. But he is committed to another plank in his mainly centrist platform: sound fiscal management. He has promised to slash the budget deficit to the current EU standard of 3 per cent of GDP next year (from 5.2 per cent by the end of this year) and to balance the budget by 2017.

He intends to accomplish this through higher taxes, rather than making deep spending cuts or tackling the country's myriad structural problems. That's a tall order, given the deteriorating economy and the fact that no French government has run a surplus since 1974. By some measures, France is in worse shape than embattled Italy, which has a healthier export sector, less external debt and better-capitalized banks. After barely reaching 0.1-per-cent growth in the final quarter of 2011, France did not expand at all in the first quarter of 2012. And prospects look bleak. Exports are nearly flat, corporations have reduced capital investment, consumer spending is weak, and a rapid rise in unit labour costs is making the country increasingly uncompetitive.

Original Article
Source: Globe
Author: editorial