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Eurozone crisis

Berlin worries about sluggish French economy

Concerns that the eurozone crisis might spread to France have prompted the German government to urge France to push ahead with reforms in order to revive its sluggish economy.

The French government faces an onslaught of bad news. At the beginning of November, the International Monetary Fund (IMF) said in its financial report that the French industry's competitive capacity is meagre on an international scale. France's massive debt could become a threat to eurozone stability if investor confidence continues to drop, the IMF said, warning of a "risk of infection," since French banks are closely involved with the eurozone's southern member states.

Uterwedde

Uterwedde says France needs reforms.

The European Union is also worried. Presenting the eurozone economic growth forecast for 2013, Monetary Affairs Commissioner Olli Rehn pointed out Germany is in much better shape than France. While the Commission expects the French economy to grow by 0.4 percent, the French government predicted twice as much, 0.8 percent. The forecast sees new French debt at 3.5 percent of the country's economic performance next year, rather than the 3.0 percent predicted by the French government.

"The situation is very serious because sluggish French economic performance is not a temporary occurrence; it is based on structural problems within the French economy," says Henrik Uterwedde of the German-French Institute (dfi) in Ludwigsburg.  He told Deutsche Welle that the French President, Francois Hollande, must lower the national debt, but that austerity policies would most probably lead to a further weakening of the economy. Hollande faces a dilemma, Uterwedde says.

Overstretched finances

Louis Gallois 
PIERRE VERDY/AFP/Getty Images)

And Louis Gallois says it needs a 'jolt'

In a government-commissioned report presented last week, the French industrialist and former head of aerospace giant EADS, Louis Gallois, recommended 22 measures to bolster the competitiveness of France's industry.  A real "shock" is needed to get the industry back on track, Gallois said after talks with Prime Minister Jean-Marc Ayrault in Paris.

"The French people must support this joint effort that could become a wonderful project for our country to strengthen our industry once again," he said. It would take debates and a social dialogue in the companies, on regional and national levels, "to activate new dynamics and a fresh impetus."

In response, Ayrault announced tax reductions for businesses to the tune of 20 billion euros ($25.4 billion) over the next three years. 

What the country really needs, however, are radical reforms in the economic and administrative sectors, says Uterwedde: Hollande has not yet dared tackle structural reforms, but that is what he will have to do.

Uterwedde points out that the most recent, and highly alarming, report by the German Council of Economic Experts on the competitiveness of French businesses says that, without a "competitive jolt," the economy will not really be able to get back on its feet. And the French daily Le Figaro called on the socialist Hollande to "Be our Schröder!" - a reference to former German Chancellor Gerhard Schröder, who pushed through the Agenda 2010 labor market and social reforms despite considerable opposition.

French Prime Minister Jean-Marc Ayrault will be meeting with Chancellor Merkel in Berlin on Thursday (15.11.2012) to coordinate economic policies.

German Chancellor Angela Merkel, left, and French President Francois Hollande (Foto:Michael Probst/AP/dapd)

Merkel and Hollande are fated to co-operate

The French government is said to be concerned about "panic-mongering" in Germany over the state of the French economy. According to the Liberation newspaper, the government feels that this could create instability in the market. But Uterwedde does not see much disagreement between the two sides.

"They are fated to act together because the two countries are so closely intertwined and both lead the way in the eurozone," says Uterwedde. "We will not be able to overcome the current crisis in the eurozone without the cooperation of the two countries."

Francemust act

Francehas the willpower to launch reforms, Commisioner Rehn says, and he points out that concrete policies can still change the EU Commission's growth forecast for 2013. "At the moment, we are experiencing a possibly significant change in French policies concerning consolidation of the budget and competitiveness," Rehn told reporters in Brussels. He said it is not a static situation at all, but one of change. 

Uterwedde, too, sees President Hollande on the verge of much-needed change. Hollande knows that he must lower the national debt, but he has not yet completely thought through how to reduce the country's debt, Uterwedde concludes: "The political debates in France will be difficult."

According to the EU Commission's prediction, French public sector debt will rise to more than 90 percent of gross domestic product (GDP) next year - a critical threshold for the long-term sustainability of debt.

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