Thursday, February 16, 2012

France Clings to Growth

One could make a case for Nicolas Sarkozy's management of the French economy over the past five years. Indeed, I will make such a case in a series of talks on the elections that I have to give over the next couple of months. An additional data point arrived yesterday: France clings to (very modest) growth even as most of her European partners, including Germany, have slipped into recession.

Of course the numbers game is in many ways a mug's game. +0.2 is not very different from -0.2. France's current account remains in the red, and loss of competitiveness remains a problem, as does the painful bite of austerity. There has been no consistent vision behind Sarkozy's management since the vision he brought into office--one of very mild neoliberal reforms--was smashed by the crisis. But the French economy retains a certain dogged solidity. To be sure, its banks are an Achilles' heel, although BNP yesterday announced record profits of 6 billion €. For this the ECB is to be thanked. Banks are in the enviable position of being able to obtain funds for virtually nothing and then to lend them out again at a respectable premium. To the charge that they are lending only to sovereigns enjoying an implicit guarantee against default, BNP replies that its loan book to the private sector has expanded by 5.1% over the year.

So things may be improving on the banking side, as BNP plows 3/4 of its profits back into equity to shore up its position. Perhaps this news will comfort Moody's, which has been threatening, after S&P, to downgrade France. The possibility of a bank failure remains the French government's largest implicit contingent liability. It would have to step in if a big bank went down. So taxpayers must take a certain comfort in the big bank's windfall, even though they might smile more broadly if they had been allowed to share more fully in the boon.

I expect that Sarkozy will make a great deal of this modest success in his campaign, while Hollande, who isn't likely to change course very much if he wins, will accentuate the negative. It will be more important, however, to listen for proposals from either man likely to shift France's long-term outlook. The recent fluctuations are mere noise. And the German model, which Sarkozy has temporarily swallowed hook, line, and sinker, will soon begin to crumble, as German demographics begin to weigh, German workers grow restive under wage restraints, and competition in German export markets increases. Will France prove to be the successful rival, or will new competitors emerge?

No comments: