Frexit…by any other name

Bruno Cavalier, chief economist at Oddo Securities, says despite being in the eurozone, France is not respecting its rules, that forms a kind of Frexit.

For the eurozone to work effectively, macroeconomic rules must be respected. In some countries, this respect appears to be imprinted in the DNA of policymakers – think ordoliberalism in Germany.

In others, where the tendency leans towards permanent rule-breaking, one must rely on fear of the watchdog or the radar.

What then should be done when disciplinary mechanisms no longer work? In France, public finances almost always spiral beyond their authorised limit. But the European Commission says nothing, and market rates are so distorted by the ECB policy that they no longer impose any discipline.

France is in the eurozone but does not respect any of its rules. A kind of Frexit, by any other name.

The fortnight’s focus

For the past year, the -xit suffix has been appended to numerous terms to describe the risk of the European Union breaking up.

Grexit was narrowly averted in July 2015. Brexit is currently monopolising newspaper headlines ahead of the referendum on the UK’s place in Europe.

In France, Frexit is one of the economic pillars of the Front national (FN), according to which a return to the French franc would facilitate a wideranging competitive devaluation, a boost to the economy, a decline in unemployment, etc.

To those in its own party who point out that such a proposal is alienating many potential voters, with no desire to find themselves financially beggared, the FN president recently dismissed their claims out of hand. Marine Le Pen who regularly depicts herself in the English-speaking press as Madame Frexit, wishes to remain Madame Frexit.

In a way, this is excellent news as it reduces the chances of seeing her accede to the highest office of government in France and introduce such a programme. Abandoning the euro is not a proposal to be taken seriously in France. That said, it is worrying to observe the abandoning of the principles of how the euro works.

The basis is budgetary discipline. The Eurozone is not viable if member states do not maintain their public deficits within reasonable limits. Since the euro’s creation, France’s deficit has breached its ceiling 12 times out of 18. Only Greece and Portugal have a worse track record.

Admittedly, an EU economy can stray from the 3% threshold as long as it carries out structural reforms. In France’s case, it is only too clear that these reforms are discussed but never implemented. Brussels remains silent. Regarding market discipline, it is no longer effective given the current yield curve, part of which is in negative terrain.

Every year, despite higher debt, France pays less interest. Clearly this does not encourage the country to play by the eurozone rules.

The fortnight’s economic newsflow

After a lacklustre, but not disastrous, end to 2015 (real GDP up +0.2% q-o-q), all eyes are now on 2016. Based on its surveys, Banque de France forecasts real GDP growth of 0.4% q-o-q in Q1 2016.

The European Commission has the same forecast. For 2016, the Commission sees average growth of 1.3%, the consensus is expecting 1.4% and the government’s estimate is for 1.5%. At this stage of the year, the gaps are too low to be really significant.

For around one year, the Commission has stopped criticising the state of France’s public finances on the basis of a political “agreement”. On the one hand, an extension has been granted for the fiscal adjustment process. On the other, the government is carrying out structural reforms (or so it claims).

The Commission’s latest opinion fits in with this trend. It noted that the public deficit is decreasing but also that the structural measures fall short of what is needed for a country with an excessive deficit… for the ninth year in a row.

The Commission forecasts a deficit of 3.2% of GDP in 2017, but the figure is supposed to be lower than 3% by then.

After a q-o-q increase of 0.2% in Q4, private-sector employment was more or less flat in 2015 (+0.1%). Employment is continuing to contract in the manufacturing sector for the 14th consecutive year and in construction for the 7th consecutive year.

This was offset by the services sector, particularly in the temporary employment segment which has picked up again significantly (+5.1%), a pace not seen since 2009-2010.

After several weeks of rumours, the government reshuffle took place on 11 February. Commentators were unanimous in their opinion that this was no more than a political manoeuvre ahead of the elections in May 2017.

This was not an attempt to change economic policy as was the case in April 2014 when Manuel Valls, representing the right-wing of the socialist party, was appointed Prime Minister; or to make government action more efficient as in August 2014 (expulsion of left-wing Ministers, appointment of Emmanuel Macron as Minister for the Economy).

This reshuffle was primarily an extension in the number of governmental posts in order to make room for possible socialist party allies such as the ecologists and the center-left.

The idea is that the newly-appointment members will be less damaging to the government on the inside than they would be on the outside.

As such, the former Prime Minister Jean-Marc Ayrault, who was sacked two years ago, has been bought back in at the Foreign Office. Likewise, the Housing Ministry has gone back to the ecologists, where general opinion deemed their mandate between 2012 and 2014 as calamitous.

This comes at a time when the construction sector is showing the first signs of a timid recovery and we just have to hope that the new Housing Minister doesn’t do anything…which has got to be better than making things worse.

All told, the aim of this political manoeuvre is to make François Hollande the only eligible candidate for the 2017 elections and to minimise the threat from leftist dissident candidates.

Incidentally, Emmanuel Macron, who comes across in the media as a modern and reformist minister has seen his place in the protocol order downgraded. It is true that his attacks on the 35-hour working week and the status of public servants have not helped to mobilise left-leaning voters.

Moreover, we have known for several weeks that a second “Macron bill”, promised last autumn, would never see the light of day…to avoid, it is said, overshadowing the Prime Minister. This being the case, we wonder what Mr. Macron is still doing in this government?

Forthcoming events

Almost every day, the press reports on what may, or may not, feature in the law reforming the Labour Code (to be presented on 9 March).

This is a classic “trial balloon” tactic in an attempt to gauge which way the wind is blowing…and the social climate.

The law may introduce the possibility for companies to organize referendum among employees (référendum d’entreprise) in order to overcome the opposition of trade unions.

Moreover, a reduction in the rate of overtime pay has also been alluded to, which would be a means of relaxing legislation on the 35-hour working week.

The risk is that the law may also create new regulations to offset such flexibility-enhancing measures. This is often the way that reforms are carried out in France.

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is deputy editor and French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

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