French markets must expect a thrashing

While Europe’s recovery seems to be gaining traction, France may have fallen into a triple-dip recession, with GDP shrinking in the fourth quarter of 2013 after a decline in the third.

In December, activity in the French manufacturing and service sectors both shrank. France is now “the sick man of Europe”, says Berenberg Bank’s Holger Schmieding.

A key problem is that over the last few years, while many eurozone countries have tackled structural reforms to boost competitiveness and growth, France has barely made any effort at all.

With high payroll taxes and an inflexible labour market, companies are finding themselves priced out of export markets, while the overbearing state – public spending accounts for 56% of GDP – is hampering dynamism at home.

The government has opted to meet EU deficit targets by raising taxes yet further, increasing the burden on the economy, says Konrad Yakabuski in Canada’s Globe and Mail. It’s the path of least resistance: “any attempt to adjust, even minimally, France’s statist economic model and cradle-to-grave safety net is met with paralysing howls of protest”.

However, taxes are now so high, with a top rate of 75%, that they also trigger howls of protest – and an exodus of talent. Given this backdrop, and President Hollande’s unpopularity and lack of credibility, significant reforms to galvanise growth are not expected in 2014.

In light of the unpromising outlook, reckons David Stevenson in the FT, French stocks “could get a thrashing this year”.

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