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8/10/2019 Analysis and Trends Structural and Fiscal Measures France Update
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Topic
Understand. Act.
Structural and fiscalmeasures: France –Update
Stefan Scheurer
Vice President, Global
Capital Markets &
Thematic Research
When the EU debt crisis intensified towards the end
of 2011, investors became increasingly concerned
that contagion effects from the European periph-
erals might spread to the core countries. Market
participants’ attention shifted and focused above
all on France – Europe’s second biggest economy
after Germany. This was also reflected in CDS (credit
default swaps) and the spreads on 10-year German
government bonds, which have widened again in
recent months (see Chart 1).
In its way, the equity market appears to reflect the
loss of competitiveness. The German equity market
(DAX) has more than doubled since 2003, the year
that saw the start of reform of the German social
security system and labour market – better known as
“Agenda 2010”. The French stock market (CAC 40)
remained almost unchanged over the same period
(+20 %) – a fact which might point to a loss of com-
petitiveness (see Chart 2).
2010 2011 20132012
basis points basis points
200
180
160
140
120
100
80
60
40
200
150
100
50
0
Spread France to Germany CDS 10 years France (RH)
Chart 1: Risk Premia in France higher lately
Credit Default Swaps (CDS) and Risk Premia
vs. German 10-year Bunds (–3 years)
Source: Datastream, Allianz Global Investors Capital Markets
& Thematic Research, July 2013.
2004 2005 2006 2007 2008 2009 2010 2011 20132012
indexed indexed
250
200
150
100
50
250
200
150
100
50
DAX 30 indexed CAC 40 indexed
Chart 2: Equity Market – Indication of less
competitiveness?
Performance German Equity Index (DAX 30)
vs. French Equity Index (CAC 40) (–10 years)
Past performance is not a reliable indicator of future results.
Source: Datastream, Allianz Global Investors Capital Markets
& Thematic Research, July 2013.
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2
Structural and fiscal measures: France – Update
ligence Agency (CIA). By comparison, the figure in
Germany is more than 28 %. Furthermore, according
to estimates by the European statistical authority
(Eurostat), French companies generate a profit
margin of only 28 % as measured by earnings before
(!) interest, taxes, depreciation and amortisation
(EBITDA)1. This level is one of the lowest in Europecompared with a European average of 38.3 % (see
Chart 5).
France’s declining competitiveness
While EU peripheral nations are endeavouring to
reform their economies and implement fiscal cuts,
the French president has lowered the retirement age
for certain employees from 62 to 60. And so far the
French government has not been willing to tacklethe minimum wage, dismissal protection or the
35-hour week.
According to the OECD (Organisation for Economic
Co-operation and Development), the growth in
France’s productivity appears to be close to the Euro-
pean average (see Chart 3).
However, unit labour costs have risen 30 % since
2000 (chart 4; Germany: +10 %) (see also our Focus
article: “Pause for Thought on the EMU Debt Crisis”).
De-industrialisation of the Frencheconomy
The de-industrialisation of the French economy
in recent years has reduced the industrial sector’s
contribution to value added to just under 19 %,
according to the World Bank and the Central Intel-
indexed indexed
Spain Italy Ireland
Germany Greece
Portugal
France
9000 01 0 2 03 04 05 06 07 08 09 10 1 1 1312
100
110
120
130
140
150
90
100
110
120
130
140
150
Chart 4: Development of nominal unit labour
costs in European comparison (2000 = 100)
Chart 3: Labour productivity growth in European comparison
Source: Datastream, Allianz Global Investors Capital Markets
& Thematic Research, July 2013.
Source: OECD, Allianz Global Investors Capital Markets & Thematic Research, Nov. 2012.
4.50 %
5.00 %
3.50 %
3.00 %
4.00 %
1.50 %
2.00 %
2.50 %
0.50 %
1.00 %
0.00 %1970s 1980s 2010 –112000s1990s
France Germany Italy Spain
1 EBITDA: Earnings
Before Interest, Taxes,
Depreciation and
Amortisation.
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3
Structural and fiscal measures: France – Update
France’s shrinking share of global exports is another
indicator of the country’s lower competitiveness.
France’s share of the world’s export market was
more than 6 % in 2000, but by 2012 it had dropped
to less than 4 %. As a consequence of the loss in com-
petitiveness, the country has so far built up a trade
deficit of EUR 70 billion, which is also reflected in its
current account. Towards the end of the last century
France still had a current account surplus. Over thepast 10 years or so, this has evolved into a deficit of
almost EUR 40 billion, equivalent to –2.3 % of GDP (see
Chart 6).
The decline in competitiveness over recent years has
also been highlighted by the World Bank2 and the
World Economic Forum3. It could not only cause the
unemployment rate of the second-biggest econ-
omy in Europe to rise to 10.9 % in the year ahead
(EU–17 average: 12.1 %) – according to the French
statistical office, unemployment already climbed to
10.4 % in the first quarter of 2013, its highest level
since 1998. Moreover, the EU Commission expects
slower GDP growth against the background of the
proposed tax increases.
“Gallois Report” and further
structural measures
This makes it hardly surprising that, like the
“Gallois Report”4, which the French government
commissioned in July 2012 to address the compet-
itiveness of the manufacturing industry and which
proposed cutting social security costs by about EUR
30 billion, the International Monetary Fund (IMF)
sees the following as the two most important chal-
lenges facing the French economy:
1. Improving / reforming the labour market, and
2. Reducing government expenditure and / or low-
ering the tax liabilities of employees and compa-
nies.5
The government took a first step in this direction,
although moderate in view of the long-term struc-
tural challenges facing France. It involves using cost
savings and / or tax breaks to reduce pressure on
companies by EUR 20 billion, or 1 % of GDP, progres-
sively by 2014. The aim is to promote innovation andinvestment. The cost of this package is not to due
be covered until 2014, through spending cuts and
Chart 5: French companies – Low profit margin
Source: Eurostat, Allianz Global Investors Capital Markets & Thematic Research, Q2 2012.
50 %
60 %
40 %
20 %
10 %
I r e l a n
d
C z e c h R e p u b l i c
S p a i n I t a
l y
N e t h e r l a n
d s
F i n n l a n d
E u r o a r e a
B e l g i u m
D e n m a r k
P o r t u g a l
S w e d e n U K
F r a n c e
30 %
20
40
in bn
0
00 01 02 03 04 05 06 07 08 09 10 11 1312
–20
–40
–60
6.5 %
7.0 %
6.0 %
5.5 %
5.0 %
4.5 %
4.0 %
3.5 %
Current Account Balance France
Share of France Exports to World Exports (RH)
Chart 6: Declining share of exports –High current account balance
2 Source: World Bank,
“Doing Business 2012:
Doing Business in a
More Transparent
World”, Octob er 2011.
3 Source: World Eco-
nomic Forum, “The
Global Competitiveness
Report 2012 – 2013”,
September 2012.
4 Louis Gallois: Chief
Executive Officer (CEO)
of the aeronautic, space
and defence group
EADS until the end of
May 2012, before being
appointed Commis-
sioner General for
French state invest-
ment.
5 Source: International
Monetary Fund (IMF),
“France: 2012 Article IVConsultation – Con-
cluding Statement”,
October 2012.
Source: Datastream, Allianz Global Investors Capital Markets
& Thematic Research, July 2013.
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4
Structural and fiscal measures: France – Update
tax increases (including a rise in VAT) amounting
to EUR 10 billion in each case. The new tax charge
applicable to French companies for the rest of 2012
and 2013 is likely to balance out these cost savings,
however, with the result that the overall effect is
likely to be marginal.
In addition, French Prime Minister Ayrault
announced a further 35 measures in his “Pact for
Growth, Competitiveness and Employment” at the
start of November 2012. Most of these had already
been proposed in the “Gallois Report”, including
measures to create jobs, to promote education and
innovation or reduce bureaucracy, with the objective
of making the country’s economy more competitive.
The French government also wishes to save EUR 60
billion in state spending. The aim here is to reduce
the proportion of this expenditure relative to GDPfrom its current level of 56 % (one of the highest
within the Eurozone) to 53 % by 2017. By compari-
son, Germany’s government spending is 46 % of GDP
(see Chart 7).
Structural reforms appear necessary for several rea-
sons. First, France might find it difficult to reduce its
budget deficit (which was revised upwards for 2012,
from 4.5 % to 4.8 % of GDP) to the Maastricht crite-
rion of 3 % in the coming years. The EU Commission
forecasts budget deficits of 3.9 % and 4.2 % of GDPfor 2013 and 2014, respectively. The Commission
therefore granted France a further two years to push
the deficit below the Maastricht limit of 3 % of GDP.
Second, the country could run into problems getting
its sovereign debt under control on a long-term
basis. According to estimates by the International
Monetary Fund (IMF) and the European Commis-sion, national debt is 90 % of GDP in 2012 (see chart
8). This is the threshold at which the US economists
Carmen M. Reinhart, Vincent R. Reinhart and Ken-
neth S. Rogoff consider it could have a negative
impact on the growth rates for an economy over the
long term (>5 years) – and it is rising. .6 In compari-
son, national debt was just over 20 % of GDP in 1980.
In view of the deterioration in the long-term eco-
nomic outlook for growth and the budget as well as
the continuing loss of competitiveness, the ratingagency Fitch also downgraded its triple-A rating
(best credit rating) for France in July 2013, follow-
ing similar steps by Standard & Poor’s (S&P) and
Chart 7: France general government expenditure – One of the highest within the Euro area
Source: Datastream, Allianz Global Investors Capital Markets & Thematic Research, July 2013.
56 %
58 %
54 %
50 %
999897 00 01 02 03 04 05 06 07 08 09 10 11 1248 %
52 %
–1 %
0 %
–2 %
–3 %
–6 %
–7 %
–8 %
–4 %
–5 %
General Government Revenue France in % of GDPGeneral Government Balance France in % of GDP (RH)
General Government Expenditure France in % of GDP
6 Source: Carmen M.
Reinhart, Vincent R.
Reinhart, Kenneth S.
Rogoff: “Debt Over-
hangs: Past and Pres-
ent”, April 2012.
20132000 2002 2004 2006 2008 2010 2012
% of GDP % of GDP
100
90
80
70
60
50
40
30
20
10
0
5.0
4.0
3.0
2.0
1.0
0.0
–1.0–2.0
–3.0
–4.0
Gross Government Debt ( % of GDP, rhs)
Current Account Balance (% of GDP)
Chart 8: French public sector debt
Source: Datastream, Allianz Global Investors Capital Markets
& Thematic Research, July 2013.
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Allianz Global Invest ors Europe GmbH
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60323 Frankfurt am Main
Global Capital Markets & Thematic Research
Hans-Jörg Naumer (hjn), Dennis Nacken (dn),
Stefan Scheurer (st)
Data origin – if not otherwise noted:
Thomson Financial Datastream.
Calendar date of data – if not otherwise noted:
August 2013
Moody’s. This downgrades France’s creditworthiness
by one level and the outlook remains negative.
When seen in the context of France’s refinancing
requirements in the next two years, it could result in
rising interest costs and make efforts to get a grip on
the budget deficit more difficult.
High budget and current-account deficits might
make it more expensive for France to refinance itsdebt on the capital market in the coming years –
particularly in view of the fact that France will have
to raise almost EUR 170 bn during the remainder
of 2013 and about EUR 380 bn in 2014 and 2015
(see chart 9). This total amount may be subject to
change, since possible revisions to budget deficits
could increase the country’s refinancing require-
ments even further.
Chart 9: France’s expected refinancing volume in 2014 and 2015
Source: Bloomberg, Allianz Global Investors Capital Markets & Thematic Research, July 2013.
60
50
40
30
10
20
0
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
2014 2015
bn EUR
Although the structural reforms that the French gov-
ernment has recently undertaken are a step in the
right direction, further reforms will probably be nec-
essary to guide the French economy out of recession
and onto a competitive path of growth.