BLOG: France – “You are the weakest link”

Written by:
Is France the new 'sick man of Europe'? Jason Hollands of Tilney Bestinvest says yes.

All is not well in the Eurozone, neither economically or politically. Its previously anaemic rate of economic recovery is stalling with flat GDP growth in the second quarter, inflation is worryingly low, productivity is weak, its financial system is fragile and its banks are undercapitalised. Furthermore, Europe faces negative headwinds from the crisis over the Ukraine and the volley of tit for tat sanctions with Russia. Discontent with European institutions is widespread, reflected in the rise of anti-EU insurgent parties in this year’s European parliament elections.

While the negative headlines surrounding the European Union have long been dominated by the woes of ‘peripheral’ Europe – Portugal, Spain and Greece – it is France that increasingly poses the biggest threat to the Eurozone. France and Germany, the countries with the two largest economies on the Continent, have been the key drivers behind the whole European project and the destiny of the EU is integrally tied to the fortunes of France. Those fortunes are on the wane.

There is little question now that France is now the ‘sick man of Europe’ and many of its wounds have been self-inflicted. It has resisted structural reforms, its political elite resisting the Anglo-Saxon capitalist model. The economy of the Fifth Republic has been crippled by the disastrous socialist policies of Francois Hollande, including a punitive 75% top rate of tax, a totemic act of economic self-immolation. These policies have frightened businesses from hiring and driven swathes of entrepreneurs, professionals and celebrities abroad.

The French economy is stagnating, enduring two quarters of zero growth and unemployment is at an all-time high. That’s painful for the French, threatening social cohesion and fuelling deep resentment towards its political elite and also European institutions. It is also a drag on other countries within the Euro-bloc whose economies have significant trade exposure to France. Absence of growth means France humiliatingly had to admit it cannot meet its debt reduction target this year. This will both weigh on France’s flagging credit worthiness and also potentially jeopardize the commitment to painful fiscal discipline elsewhere in Europe. A France that unravels economically and in its commitment to the EU, could arrest the march towards European integration at a time when others, notably the UK’s David Cameron, are arguing for a repatriation of powers to member states.

For investors, the outlook for European equities could be a crossroads. A year ago many professional investors sighted a valuation anomaly in European equities but to a considerable degree that has now closed. Given this and the weak macro-outlook, the key drivers of European equities from here will be the next set of moves by European Central Bank (ECB) which has operated a tighter monetary approach than other major central banks. The case for more aggressive monetary stimulus measure is mounting, which could culminate in full-blown QE. This would likely weaken the Euro and support European equities. However, that isn’t a given.

Jason Hollands is managing director at Tilney Bestinvest.

Related Posts

Tag Box

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Unfamiliar banks woo savers with top rates…is your money safe?

If you’ve been keeping an eye on the savings best buy tables, you’ll have noticed some unfamiliar names lu...

What the base rate rise means for you

The Bank of England has raised the base rate by 0.25% to 0.5% – following on from the increase from 0.1% to ...

How to get help with your energy bills

The rise in the energy price cap from April will mean millions of households will pay hundreds of pounds a yea...

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Having a baby and your finances: seven top tips

We’re guessing the Duchess of Cambridge won’t be fretting about maternity pay or whether she’ll still be...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Money Tips of the Week