France Losing Edge Vs. Germany, Greece

Investor's Business Daily

Europe's exports offer signs of hope for countries rebuilding their economies amid the debt crisis rubble but also contain a warning for other countries, especially France, that have put off critical reforms.

Moody's recent credit downgrade of France cited an economy hobbled by rigid labor, goods and service markets, which hurt the fiscal outlook as well.

While countries in the eurozone's periphery have liberalized significantly, France has held off and its trajectory is a big question mark, said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics.

"This is my main concern about the eurozone," he said.

European Pillar Or Anchor?France's lagging competitiveness has prompted worries over its long-term viability as a pillar of the European economy.

German officials are reportedly concerned that plans to improve France's position are insufficient. The Economist magazine recently dubbed France "the time-bomb at the heart of Europe.

While Athens has dragged its feet on reforming the economy, it has made some progress beyond the "internal devaluation" forced by five consecutive years of shrinking GDP.

Such reform is especially important because eurozone members can't benefit from a depreciating currency to lift competitiveness.

Since 2009, Greece's exports of goods to countries outside the eurozone have jumped 133%, the biggest gain in the currency union except for Estonia.

That compares with the 49% increase in Greek exports during the eight years leading up to the financial crisis in 2008. The crushing depression has lowered labor costs, making its products cheaper.

Italy and Spain have seen smaller increases in goods exports, but those made in the last three years are comparable to those in the eight years to 2008.

Then there is France. While it is often compared to Germany, France has lost significant competitive ground to its neighbor since Germany enacted cost-saving labor reforms in 2002.

German exports nearly doubled in the decade since, while France's grew about a third. German unit labor costs fell below French ones in 2006. Spain's beat France's last year.

After leading Italy in exports during the decade following the euro's launch, France is now roughly even.

The main problems Kirkegaard sees in France are the high payroll taxes employers must pay for workers, difficulty laying off staff, and a highly centralized collective bargaining system that extends concessions gained nationally to the lowest levels locally.

Francois Hollande, elected president in 2012, doesn't face the voters again for five years, but his window of opportunity to turn around the economy before then is closing, Kirkegaard noted. Given that reforms take a few years at the earliest to pay off, he figures the French socialist has to act in the next six months.

"Based on his own political calendar, he needs to hurry," he said.

France Next In LineMeantime, investor scrutiny is poised to shift away from Spain and Greece and toward France.

Once Madrid finally requests a sovereign bailout and Greece's ongoing drama tilts toward continued membership in the eurozone, markets will start to focus on France, Kirkegaard predicts.

But before market pressure piles up, he sees signs that Germany is already applying political pressure to reform. He hopes Hollande is enough of a pragmatist to ditch the left-wing agenda he campaigned on and pursue more market-friendly policies.

Structural reforms would indeed help France, but its economy is large and diverse enough to avoid a crisis, says Bill Adams, senior international economist at PNC Financial.

He is more concerned about seeing the euro placed on sounder footing with a banking union and a sustainable path for Greek debt.

"I'm less worried about France than, for example, Japan," Adams said.

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