The Franco-German motor in the EU is not working in harmony and this is getting more and more obvious lately, as from the data for the French economy so from the relations between the two countries and the messages they convey to each other. The disharmony between France and Germany has culminated this week after the French economic woes appeared among the main topics at the meeting of the Eurogroup on Monday, which forced the finance ministers of the two countries to appear together at a joint news conference in the margins of the Ecofin (the EU finance ministers in Brussels) on November 13th to demonstrate their unity. Those coincided with the first official press conference by French President Francois Hollande on the occasion of his first six months in office.
Decline is not our destiny
Tensions between the two neighbours began to rise in the beginning of the month when on November 5th was published the report on France's competitiveness, ordered by President Hollande and prepared by Louis Gallois, former chief of the European aerospace agency EADS. The conclusions in the report show that the French economy is losing steam and market share abroad. At the moment, the French share of eurozone exports is 13%, compared to 17% a year ago. The report makes 22 proposals, among which reducing social contributions paid by employers by 20 bn euros and by 10 bn euros of those paid by the employees. Louis Gallois believes that the income taxes should be reduced by 30 bn euros in two years.
According to the autumn forecast of the European Commission, French economy is slowing down, although it is performing much better than many of its peers in the euro area, thanks mainly to the relatively resilient domestic demand. However, there is a deterioration of the business environment and the labour market which creates expectations for a continued stagnation and contraction of economic activity in the second half of 2012. Against the backdrop of the bad news from the eurozone, France could boast economic growth of 0.2% in 2012, but the Commission forecasts growth to remain anaemic.
The French economy's biggest problem is exports decline mainly due to deterioration of external competitiveness, not to any global issues. French companies will continue to lose market share, the Commission predicts. To the economic anaemia the forecast adds also limited credit growth which, for its part, limits investments and the "pace" of recovery.
Fiscally, the general government deficit this year is expected to reach 4.5% of GDP, down from 5.2% last year. The forecast sees the deficit dropping further next year when the 2013 budget envisages it to reach 3% of GDP. Spending growth is expected to remain below its usual levels because of the measures to limit spending - the basic wages have been frozen, transfers from the central government to the local authorities have also been frozen, only partial indexation of of the social benefits is foreseen and tighter healthcare spending. Besides, the forecast says, the pension reform in 2010 is expected to deliver, after a gradual increase of early retirement age from 60 to 62 years and of full retirement age - from 65 to 67 years.
Nonetheless, debt will continue to grow and is expected to reach 90 per cent by the end of the year, mainly because of the expected higher deficits. In spite of the high debt level, though, investors still trust France, which is visible from the yields on the 10-year bonds, the price for which has dropped, according to Bloomberg, by 0.005 pp on November 13th to reach 2.055%, while the spread between the French and German 10-years has reached the record 72 basis points. A year ago, the spread was over 200 points and 143 when Hollande took the helm in May, the agency recalls.
What draws attention in the Commission forecast is that it is too cautious. The concerns, however, were visible in the statement of EU Monetary Affairs Commissioner Olli Rehn after the end of the Eurogroup meeting last Monday evening. Instead of beginning with Greece, which was the main issue of the meeting and everyone before him started with the Greek drama, Mr Rehn began with the reforms programmes of the Netherlands and France, pointing out that those are "very significant programmes for fiscal consolidation and recovery of competitiveness. We welcome them and we will get back to them". He said nothing more, but the very fact that he began his statement with these two countries, as well as the vow "we will get back to them" are very telling.
And if the European Commission is cautious in its assessment and recommendations to one half of the European motor (France), Germany seems much more worried which is evident in the more and more frequent remarks by close to Chancellor Merkel politicians, calling on France to undertake measures to restore its competitiveness and putting forward the question whether France will be the next sick man of Europe. This question was asked by a French journalist during a rare event in the last six months (since Francois Hollande has been in power in Paris) - a joint news conference by the finance ministers of the two countries - Pierre Moscovici of France and Wolfgang Schäuble of Germany. That question the German finance minister answered with determination and resolve, saying: "No! This question should not remain unanswered not even for a second!"
The Wall Street Journal recreates the scene with the answer in a very amusing way, saying that Mr Schäuble literally "barked" the answer in the room, while in the same time his French counterpart "remaining impressively calm as his right ear took the brunt of the blast". Bloomberg quotes Schäuble warning against the constant naming of this or that country a sick man. "We have trust in the policies of the French government", he says. The German defence is well appraised, judging from the response by Pierre Moscovici, also quoted by Bloomberg: "I’m grateful to Wolfgang Schaeuble" for expressing his confidence "so forcefully". Bloomberg does not say whether, while thanking, Mr Moscovici held his ear, but not that grateful seemed on November 13th French President Francois Hollande.
During his first news conference since the elections, attended by over 400 journalists and which lasted more than two hours, of which only Hollande's speech was 40 minutes, Francois Hollande made it clear that Germany does not write the rules. Regarding the German concerns about France's falling competitiveness, Mr Hollande announced that he talked openly with the German chancellor, but underlined that "we don't teach each other lessons". "We in France more than others have to prove our seriousness and our competitiveness, more than Germany, and that's what we are doing. And Germany ... has to prove its solidarity, which is not easy when a country has made such an effort to become what it is today", said Hollande in an attempt to soften his stance towards Germany.
Then Reuters reported on the occasion of a visit by Jean-Marc Ayrault in Berlin that he was tasked to tell Chancellor Merkel that France was to reform "at its own pace", which is probably the French understanding of solidarity. According to Hollande, "The chancellor and I have one common responsibility: to move Europe forward. We do not tell each other what to do".
After all this, however, there is the question how exactly will Berlin and Paris move Europe forward since they have differences on major issues in the European agenda, among which the single banking supervision, control over eurozone members budgets by Brussels and the more philosophical issue which should be first - austerity measures or boosting growth. Their differences are obvious also in their perception - Germany claims it is concerned about the French economy, while France believes Germany is teaching it lessons. Is this the way to move Europe forward through the "rough waters" (after the title of the autumn economic forecast "Sailing through Rough Waters")?