France: Europe’s weakest link

The recovery in the eurozone has lost momentum. Activity in the manufacturing and services sectors has hit a six-month low, according to key surveys. France’s performance was especially disappointing – private-sector output has fallen in four months out of six this year. Meanwhile, Germany’s closely followed indicator of business confidence is also at a six-month low.

What the commentators said

The eurozone has spent much of the year hoping growth will be strong enough to prevent a slide into deflation. This latest data “will keep the region’s policymakers feeling anxious”, said Richard Barley in The Wall Street Journal. Germany still looks solid, but France is “acting as a brake”, both on Germany, its top trading partner, and on the eurozone as a whole. Inflationary pressures are picking up, but this is due to higher oil prices, which will “act as a tax on growth”. All of this is “hardly likely to excite investors who have ploughed cash into European stocks on the promise of a recovery – and may be starting to wonder when it will arrive.”

So what’s gone wrong in France? The French national statistics bureau now reckons growth will reach just 0.7% in 2014, rather than the 1% the government has pencilled in. Two years of tax hikes, along with high unemployment and ongoing austerity, have undermined confidence and investment among consumers and businesses. Exports have not been strong enough to pick up the slack. These problems are counteracting “genuine, but piecemeal and contested attempts at reform”, said Pierre Briançon on Breakingviews.

But even slow progress is still progress, said Capital Economics. Liberalisation of the labour market and corporate tax cuts, along with a fall in labour costs relative to other core countries, are helping. Companies are planning to invest more money over the next few quarters. Throw in a gradual export recovery as the overall eurozone outlook improves, and France “might even strengthen a bit towards the end of the year”.

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