A weakening economy and bank troubles are putting France in the Euro firing line

This week I have covered the situation in Greece and Spain as I have reviewed the deteriorating economic situation in both of those countries. I found a little more cheer in Ireland although something of a caveat has developed there which I intend to address in due course. Those who have followed my twitter coverage will have noted my updates on this subject. However as well as the countries in the Euro area which are plainly in distress there are others who are on the edge of it. A little like a Swan serene on the surface but perhaps paddling hard invisibly under it. To my mind France is in this category and I intend now to explain why I think this.

Serene as a Swan

This is an easy bit as we only need to take a look at her government bond prices and yields. Her benchmark ten-year bond yield is at 2.16% so she is under no pressure from   the so-called “bond vigilantes” and can finance her borrowing and debt maturities cheaply. Compared to this time last year when the yield was circa 3.5% there has been a clear improvement.

If we look wider at financial markets her stock market looks stable with the CAC-40 index again higher than a year ago. However the serenity weakens somewhat here as we observe that at 3396 it remains a long way from the pre credit crunch peaks in the 5700s. By contrast the German Dax benchmark is quite near to its pre credit crunch highs.

Paddling hard under the surface

Industrial Output

The French statistics office has told us this today.

In September 2012, manufacturing outputdecreased strongly in volume (-3.2%). Output decreased in industry as a whole(-2.7%).

So weak looking numbers on the month and if we look back for some perspective we see this.

Manufacturing output decreased by 1.9% (y-o-y). (They do not tell us here the industrial production numbers y-o-y so let me help them out they are -2.1%)

We can take further perspective by looking at the underlying indices where 2005=100. Industrial production is at 89.4 and manufacturing is at 88.7. So France has a fair way to go to get back to 2005 levels and sadly she is currently going the wrong way.

Putting it another way she has gone back to 1996/97.

Investment is weakening too

Surveyed in October 2012, business managers forecast that investment in the manufacturing industry would slightly increase by 1% in 2012. They revised 4 points downwards their previous expectations given in July 2012.

Surveyed for the first time on their 2013 investment prospects, business leaders forecast a decrease in their investment between H2 2012 and H1 2013.

So we see that business leaders are expecting a weakening and if we look for detail whilst they expect some weakening in export markets the main driver is the domestic one.

Unemployment is rising

The last full report told us this.

In Q2 2012, the average ILO unemployment ratein metropolitan France and overseas departments stood at 10.2% of the active population.

However Eurostat reported last week that the seasonally adjusted unemployment rate was 10.8% in September which shows a worrying rise in what after all was supposed to be part of the recovery period.

What about government debt?

This is rising too as at the end of the second quarter it was 1.833 trillion Euros compared to 1.696 the year before. Compared to economic output the ratio rose from 86% to 91%. So if Reinhart and Rogoff were right about 90% being a significant barrier or threshold France has now crossed it. Going forwards she only intends to borrow more although of course the growth of this is expected to be reduced by her plans for austerity. At this point I would just point out that so far the record of austerity in actually doing this has been poor.

Austerity will weaken her economy

The 30 billion extra Euros of austerity announced back in September will begin to bite as time goes by. Put another way it is around 1.5% of economic output which is intended to be subtracted during a downturn. We now know where that road leads and it leads to economic decline which could be quite sharp.

What do the surveys tell us?

The purchasing manager’s indices give us the most timely information that we receive and they tell us this.

Final Markit France Services Activity Index at 44.6 (45.0 in September),

Final Markit France Composite Output Index at 43.5 (43.2 in September),

If we add in that her manufacturing index was at 43.7 we see that all of these are much lower than the benchmark of 50 and show a considerable contraction rate. So we can expect the official numbers to continue to deteriorate.

The Bank of France has added in its business sentiment indicators today and you get a flavour of it from the numbers being 91 and 92 against a benchmark of 100 but interestingly they add this.

According to the monthly index of business activity (MIBA), GDP is expected to decline by 0.1% in the fourth quarter of 2012 (first estimate).

What about the French banks?

When the credit crunch began we saw an extraordinary amount of hubris from the then French President Nicholas Sarkozy. He blamed Anglo-Saxon banking for the credit crunch.

Even our Anglo-Saxon friends are now convinced that we must have reasonable rules

This had the implication that the banks of La Republique had avoided such behaviour. Unfortunately for France they have not. Several of them decided that Greece was the place to expand in at on the newswires today are the results of one of these expansion plans. From Bloomberg.

Credit Agricole, led by Chief Executive Officer Jean-Paul Chifflet, agreed last month to sell its Emporiki Bank unit to Greece’s Alpha Bank under terms cutting the French lender’s net income by 1.96 billion euros. The company is ending a six-year investment in Europe’s most indebted country as concerns linger Greece might exit the euro area.

Credit Agricole has declared a 2.85 billion Euro loss for the last quarter which apparently in the way of modern-day accounting means that if you exclude all  the losses it may have a profit! So she is further weakened ahead of a likely French economic slowdown. As I type this her shares are down 6% as investors digest a 2.2 billion Euro investment which caused a total of 5.7 billion Euros of losses.

Also my old friend Dexia has been in the news. From Bloomberg.

Belgium and France, wrestling for more than a year over the second rescue of Dexia, agreed on a 5.5 billion-euro ($7 billion) recapitalization of the bank and will charge the bank less for its government funding backstops.

These problems keep returning do they not? Dexia seems to be simultaneously occupying steps 8 and 11 of my timeline for a bank collapse.

French taxpayers may well be concerned by the fact that their share of the Dexia bailout seems to have risen from 35.6% to 45.4% on the quiet.


As can be seen from today’s update there are genuine concerns that France is next on the list for the by now familiar Euro area austerity inspired downwards spiral. As she weakens more and more eyes will turn to her ability to support her weakened banking sector. As you can see from the above the bills are beginning to mount. But also she faces a bill from the bailout programmes she is committed too for her Euro area partners who are in trouble. As of the latest numbers up to the end of the second quarter such lending represents some 1.7% of her GDP  to this we can add and rising. Lower income and higher debt does not make a happy mix make as Mr. Micawber observed all those years ago.


25 thoughts on “A weakening economy and bank troubles are putting France in the Euro firing line

  1. Hello Shaun,

    can you comment on the likely hood that the Euro project will fall if we get a Greece and Portugal bailouts , then a almighty Spainish one, because from this deck chair I can see the debt mountain growing and the SS Euro-titanic is not changing course !!

    Also in other news – the QE profits are being returned to the Gov. I think you predicted this and this is one of the reasons QE has stopped ( for the time being) , isn’t this all just moving the deck chairs around ?


    • Hi Forbin

      I did discuss this cash flow reshuffle for UK QE about a week or so ago. Although they deny it now I expect it to be used in the future (say pre-election) to loosen the UK’s fiscal purse strings.

      The Euro problem is that as more countries need bailout cash not only does the amount required rise but the number available to supply it shrinks too.

      • Forget bail-outs for a moment. France I think is very much exposed to Greece. What happens to her if Greece goes down with a default?

        • Hi Vassilis

          I think you get your answer in the way that the French banks are scuttling out of the Greek banking sector like scalded cats! Also some of the risk has gone to the ECB and the EFSF. The catch is the fact that she also backs those two….

          So a Greek default would to my mind still pose problems for France via her banks.

  2. It seems to me that the Euro project can be seen as tying everyone to the German way of thinking and that, therefore, the further your particular country is from that way of thinking, the more damaging the Euro is. So, for example:
    1. Southern countries are used to high inflation and so quickly become uncompetitive with Germany, as productivity gains are required now that currency deflation is not an option
    2. Southern countries are used to higher interest rates, so the experience of Germanic ultra-low rates resulted in classic boom and bust such as in Spanish housing and construction
    3. This has a knock on effect on Governments, which lose all sesne of discipline, as the markets provide the cash rather than taxpayers

    The French position is somewhat in the middle, in my opinion, which is why its train wreck is taking longer, but there will still be a train wreck.
    I seem to recall (apart from the horrible French debt levels noted above) that the terms of trade have moved away since the introduction of the Euro by about the following:
    Spain, Italy and Greece 30%
    France 22%
    These, if correct, go some way to explain the crash in slow motion called France.

  3. I admit to being a little confused.

    It seems the choice to me is to reduce deficits i.e. austerity or maintain/increase them i.e. Keynesian style stimulus.

    If austerity “leads to economic decline” – e.g. the downward spiral of Greece then that suggest that governments must maintain/increase their deficit spending even as many of them approach or exceed the 90% barrier.

    To fund these deficits then governments must either borrow from the market or monetise them via QE.

    But given the parlous state of their debts, continuing deficits, threat of further downgrades, stagnant or falling GDP and persistent inflation then that suggests that free market bond yields would be far in excess of what these countries can afford. I think Spain showed where yields would quickly head without endless central bank interventions.

    So if austerity, can’t work, surely that means QE is the only other approach – to monetise the deficits so government can deficit spend without being bankrupted by interest payments.

    In other words the choice is simply austerity or QE – surely this is what we are witnessing now (although ECB is trying its best to muddy the distinction).

    So I am confused – if austerity doesn’t work (which I agree with) and QE doesn’t work (which I also agree with) – then what are the other options ? If governments are to run big deficits then how are they to fund them ? If they keep running deficits they are headed way past the 90% barrier.

    As far as I am concerned, QE is just default by inflation. I can also see Greek style austerity will probably end with outright default. In fact I think default is unavoidable for a lot of major western economies – its just a question of the path taken.

    Overall I feel austerity forces restructuring whereas QE perpetuates the status quo (e.g. UK housing market) and as we need change then perhaps austerity is a more honest path to default. QE and mocksterity are creating a phoney recession in the UK – I fear its just pushing the pain further down the road and ultimately it will be much worse when we arrive.

    So is there another path then ?

    • Hi Dave S,
      “So is there another path then ?” I have an idea, simply that total Public expenditure remains constrained at it’s current level, but Public money is moved away from Public Sector to private sector via infrastructure spending (New high speed railway, railway electrification, new railway signalling system, all existing roads repaired just to begin with).

      In my view this will spur Civil engineering firms to start hiring some of the currently unemployed builders as a lot of skills required for infrastructure projects are readily transferable from the domestic building trade.

      The Government gets excellent value for money as the firms cut estimates to the bone to get the business and it saves on social security payments whilst receiving more tax revenue. This would be a slow, long winded process requiring careful calibration, but as the economy picked up the firms would be encouraged back into building housing too but not on the same scale.

      Meanwhile, the Government retrains masses of left over unemployed for new industries. That’s where my theory fails because I haven’t a clue what new industries would absorb the rest of the unemployed, but maybe that answer will become apparent as time passes.

    • Maybe QE in its current guise doesnt work because the printed cash isnt getting where its actually needed. To date, as far as I can see, its being used to get the banks off the hook, and to maintain an over inflated public sector.

      As Noo 2 E… points out above QE should be directed solely at infrastructure improvements and investments in small businesses. Anything else is like throwing the cash into a bottomless pit.

    • As far as I can see it means nothing at all. Its creative accounting similar to that where numerous governments have taken the assets of various pension funds, thus claiming a reduction in defecits “created” by those assets while simultaneously omitting to declare the additional future pension liabilities.

      • I dont think Peston understood what is going on here. It is simply amazing, as I feel that:
        1. The government has issued lots of bonds at, say, 3%
        2. The boe has then invented money to buy them
        3. The boe rate is 0.5%
        4. The government has decided that, whatever the coupon on these bonds is, they are only going to pay 0.5%
        5. the surplus is given to the government

        The government is basically and totally fraudulently financing its operations at 0.5%, when it is clear that the markets demand more.
        However, when even Peston cannot explain soemthing, the government is on to a sure fire winner. Why tax or cut expenditure when you can create profits out of thin air?

        BTW did you hear radio 4 this morning. Even the BBC has cottoned on to France’s problems…

  4. Not able to add much as it has all been said on these pages today.But note IAG say they are getting rid of 4,500 workers in Spain which I guess will lead to further strikes etc.And I thought Barcelona losing to Celtic was as bad as it gets.

  5. From the Telegraph

    “Finance minister Wolfgang Schaeuble (pictured, below) has asked its panel of economic advisers, known as the “wise men”, to look into France’s reform proposals, amid concerns that weaknesses could spread to Germany and the rest of Europe, according to Reuters. More from the newswire:
    Schaeuble’s request denotes growing concern in Berlin and among private economists over the health of the French economy, which is set to miss a European Union goal for reducing its public deficit next year.”

    Looks like Wolfgang reads your blog Shaun……..

      • They could call the initial German plan for the running of the French economy “Fall Gelb” (Case Yellow) and the second German plan when they take over the running of France’s economy and industrial law “Fall Rot” (Case Red). All under the EU umbrella of course.

        The French can leave the doors open to their “Minister of the Economy, Finances and Industry” and their central bank “The Banque de France” in Paris, so the Germans can take over with the minimum of fuss and damage. :-))

  6. Hi Shaun,

    Looks like France is running out of spending other people’s money through taxation, borrowing and EU subsidies including CAP.

    75% wealth tax was never going work in a 27 country market with the free movement of people and goods. So many of the rich people move which means their spending is lost from their economy. Rich people tend to start and invest in new businesses close to their location, so they can be actively involved. So the UK and Switzerland particularly have a lot to thank Hollande for, with him boosting their economies.

    The Euro and the politicizing of the common market to form the EU were both French initiatives which are both going to fail. They were hoping to create a socialist fortress Europe, with high import taxes and protected noncompetitive industries. An example of this is we still have an EU wide import tax on video recorders, to protect Thompson-CSF (who no longer make them), which is why digital cameras imported into the EU only record for a maximum 29 min 59 seconds to avoid this. French history is littered with failure, with their drive for European hegemony being the latest. Globalization and the BRICS have made that impossible.

    I see the Chancellor has pulled a rabbit out of his hat for the Autumn statement by taking the £35bn of accrued interest on QE and using it to cut the deficit.

    Many newspapers are calling this a windfall, but we know different, he has plucked some more of our feathers without us hissing over higher inflation reducing our real incomes by 13.2%, lower interest rates for gilt holders and annuities for pensioners.

    Now I thought the interest was being held to cover any losses when the BOE QE gilts are sold? So I presume they will now be held until maturity or money will have to flow the other way in the future (interest rates in the future will almost certainly be higher), so they have just kicked the QE end game can down the road.

    • Hi Rods

      I discussed this QE reshuffle just over a week ago and have already put a link to it on an earlier reply on here. It is essentially a cash flow change rather than the “profits” some may present it as.

      However there is of course a catch and let me illustrate it from the HM Treasury statement.

      “At some point in the future, as monetary conditions normalise, it is likely that the cash flows will need to be reversed. Return payments from the Government to the APF may be necessary to meet shortfalls in the APF’s net income as the Bank Rate rises, or capital losses on its gilt holdings as the Monetary Policy Committee unwinds QE. The previous Government agreed that any future losses incurred by the APF will be met in full by the Government. “

      • “The previous Government agreed that any future losses incurred by the APF will be met in full by the Government.”

        Ahh, now I see the potential problem.
        Thanks for that Shaun.

  7. Hi Shaun
    I know you dont like to make this ‘political’ but the EU and the EZ is all about politics.
    It is an unpalatable truth that many of the ruling elite in most continental european countries see Germany as the natural ruler of the continent. That feeling may not be shared by vast swathes of each country’s population, but increasingly they are without a voice.
    In the area of France where I currently reside, near to the Swiss border there is no doubt where natural preferences lie. France is a country as split as the US in its voting patterns, philisophy and allegiencies.
    Nobody in the EZ with any sort of ‘wealth’ in Euros will give that up easily for ‘national currencies’. Economics has replaced armed combat with exactly the same results.
    The UK needs ‘old’ friends as quickly as possible, there is no love lost in central europe for the ‘island kingdom’.

  8. Hi JW

    I found this bit particularly intriguing.

    “The UK needs ‘old’ friends as quickly as possible, there is no love lost in central europe for the ‘island kingdom’.”

    Wasnt the EU supposed to bring people together ? Perhaps it did for a while but now it seems to be tearing them apart as it tries to get more federal.

    • Hi Shaun
      The EU as a super-EFTA was fine.
      The EU as a federal state, needs a leader(s). Merkel’s recent speech to the European Parliament was illuminating. She sees the European Federal State as led by technocrats, but ruled by Berlin. Most of the EU ruling elite see this as the natural course of events.
      There is a still a strong element of the UK’s ruling elite ( and I dont mean politicians) who are not in the same ‘club’. Their links are still with the English speaking world. There are long memories and emnities between the two. Of course these things are never black and white, but in general, its safe to assume that ‘the English’ are not loved. Somewhat ironic when you think of the numbers of wealthy ‘europeans’ residing in London.
      The EU and EZ are political constructs and the relatively short term economic factors are used to promote the political plans.
      With the US increasingly focussed on east Asia , the UK needs to reignite strong links with the English speaking commonwealth. Everyone needs friends, there are no others left.

  9. Good reading and good comments. I refer mainly to Dave S when he posts about the choices we face. I have turned the problems over in my mind now for 5 years, since I first belatedly realised the wheels were about to come off. I haven’t been able to see a way out. QE is in my view a dead-end as any “gain” is instantly lost in the inflationary/taxation elements on UK incomes. (No such thing as a free lunch). I understand the seductive nature of “infrastructure investment” but surely all we would do there would be to put politicians back in the infamous business of picking winners. The government of the day would have to oversee the disbursement of the funds and given the track record of bureaucrats we would see gross over-paying for what (at least in the case of rail) are already subsidised loss-making industries.There is no proper way to guarantee that the other good effects would actually benefit the UK population. I can only see one remedy for what is happening which is that government spending must shrink to the level of revenue. Of course, I don’t want that any more than the next man as it will impact on me and mine too. However, I can’t see how it can be avoided. If the problem was just or mainly UK based I might see it (like the 1970’s) but this is worldwide.

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