analysis and trends structural and fiscal measures france update

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.





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: 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


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.





4


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





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Imprint

Allianz Global Invest ors Europe GmbH

Bockenheimer Landstr. 42 – 44

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.

analysis and trends structural and fiscal measures france update

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