Structural and fiscal

measures: France
Update

Topic

Stefan Scheurer
Vice President, Global
Capital Markets &
Thematic Research

When the EU debt crisis intensified towards the end

of 2011, investors became increasingly concerned
that contagion effects from the European peripherals might spread to the core countries. Market
participants attention shifted and focused above
all on France Europes second biggest economy
after Germany. This was also reflected in CDS (credit
default swaps) and the spreads on 10-year German
government bonds, which have widened again in
recent months (see Chart 1).

In its way, the equity market appears to reflect the

loss of competitiveness. The German equity market
(DAX) has more than doubled since 2003, the year
that saw the start of reform of the German social
security system and labour market better known as
Agenda 2010. The French stock market (CAC 40)
remained almost unchanged over the same period
(+20%) a fact which might point to a loss of competitiveness (see Chart 2).

Chart 1: Risk Premia in France higher lately

Credit Default Swaps (CDS) and Risk Premia
vs. German 10-year Bunds (3 years)

Chart 2: Equity Market Indication of less

competitiveness?
Performance German Equity Index (DAX 30)
vs. French Equity Index (CAC 40) (10 years)

basis points
200

basis points
200

indexed
250

indexed
250

180
150

160

200

200

150

150

100

100

140
100

120
100

50

80
60

2010

2011

Spread France to Germany

2012

2013

CDS 10 years France (RH)

Source: Datastream, Allianz Global Investors Capital Markets

& Thematic Research, July 2013.

40

50

50
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
DAX 30 indexed

CAC 40 indexed

Past performance is not a reliable indicator of future results.

Source: Datastream, Allianz Global Investors Capital Markets
& Thematic Research, July 2013.

Understand. Act.

Structural and fiscal measures: France Update

Frances declining competitiveness

ligence Agency (CIA). By comparison, the figure in

Germany is more than 28%. Furthermore, according
to estimates by the European statistical authority
(Eurostat), French companies generate a profit
margin of only 28% as measured by earnings before
(!) interest, taxes, depreciation and amortisation
(EBITDA)1. This level is one of the lowest in Europe
compared with a European average of 38.3% (see
Chart 5).

While EU peripheral nations are endeavouring to

reform their economies and implement fiscal cuts,
the French president has lowered the retirement age
for certain employees from 62 to 60. And so far the
French government has not been willing to tackle
the minimum wage, dismissal protection or the
35-hour week.
According to the OECD (Organisation for Economic
Co-operation and Development), the growth in
Frances productivity appears to be close to the European average (see Chart 3).

EBITDA: Earnings
Before Interest, Taxes,
Depreciation and
Amortisation.

Chart 4: Development of nominal unit labour

costs in European comparison (2000 = 100)
indexed

However, unit labour costs have risen 30% since

2000 (chart 4; Germany: +10%) (see also our Focus
article: Pause for Thought on the EMU Debt Crisis).

De-industrialisation of the French

economy

150

140

140

130

130

120

120

110

110

100

100

90

The de-industrialisation of the French economy

in recent years has reduced the industrial sectors
contribution to value added to just under 19%,
according to the World Bank and the Central Intel-

indexed

150

00 01 02 03 04 05 06 07 08 09 10 11 12 13
Spain
Germany

Italy

Ireland

Greece

90

Portugal

France

Source: Datastream, Allianz Global Investors Capital Markets

& Thematic Research, July 2013.

Chart 3: Labour productivity growth in European comparison

5.00 %
4.50 %
4.00 %
3.50 %
3.00 %
2.50 %
2.00 %
1.50 %
1.00 %
0.50 %
0.00 %

1970s
France

1980s
Germany

1990s
Italy

2000s

2010 11

Spain

Source: OECD, Allianz Global Investors Capital Markets & Thematic Research, Nov. 2012.

Structural and fiscal measures: France Update

Chart 5: French companies Low profit margin

60 %
50 %
40 %

30 %
20 %

ce
an
Fr

UK

ed
en
Sw

ga
Po
rtu

De
nm
ar

iu
Be
lg

ro
Eu

Fin

nl

ar

an

ea

s
nd

Ita
ly

Ne
th
er
la

ain
Sp

bl
Re
pu

Cz

ec
h

Ire
lan

ic

10 %

Source: Eurostat, Allianz Global Investors Capital Markets & Thematic Research, Q2 2012.

Frances shrinking share of global exports is another

indicator of the countrys lower competitiveness.
Frances share of the worlds export market was
more than 6% in 2000, but by 2012 it had dropped
to less than 4%. As a consequence of the loss in competitiveness, the country has so far built up a trade
deficit of EUR 70 billion, which is also reflected in its
current account. Towards the end of the last century
France still had a current account surplus. Over the
past 10years or so, this has evolved into a deficit of
almost EUR 40 billion, equivalent to 2.3% of GDP (see
Chart6).
The decline in competitiveness over recent years has
also been highlighted by the World Bank2 and the
World Economic Forum3. It could not only cause the
unemployment rate of the second-biggest economy in Europe to rise to 10.9% in the year ahead
Chart 6: Declining share of exports
High current account balance
in bn $
40

6.5 %

Source: World Bank,

Doing Business 2012:
Doing Business in a
More Transparent
World, October 2011.

Source: World Economic Forum, The

Global Competitiveness
Report 20122013,
September 2012.
3

Louis Gallois: Chief

Executive Officer (CEO)
of the aeronautic, space
and defence group
EADS until the end of
May 2012, before being
appointed Commissioner General for
French state investment.

This makes it hardly surprising that, like the

GalloisReport4, which the French government
commissioned in July 2012 to address the competitiveness of the manufacturing industry and which
proposed cutting social security costs by about EUR
30 billion, the International Monetary Fund (IMF)
sees the following as the two most important challenges facing the French economy:

2. Reducing government expenditure and/or lowering the tax liabilities of employees and companies.5

Source: International
Monetary Fund (IMF),
France: 2012 Article IV
Consultation Concluding Statement,
October 2012.

6.0 %

5.5 %
5.0 %

20

4.5 %
40
60

Gallois Report and further

structural measures

1. Improving/reforming the labour market, and

7.0 %

20

(EU17average: 12.1%) according to the French

statistical office, unemployment already climbed to
10.4% in the first quarter of 2013, its highest level
since 1998. Moreover, the EU Commission expects
slower GDP growth against the background of the
proposed tax increases.

4.0 %
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Current Account Balance France
Share of France Exports to World Exports (RH)

Source: Datastream, Allianz Global Investors Capital Markets

& Thematic Research, July 2013.

3.5 %

The government took a first step in this direction,

although moderate in view of the long-term structural challenges facing France. It involves using cost
savings and/or tax breaks to reduce pressure on
companies by EUR 20 billion, or 1% of GDP, progressively by 2014. The aim is to promote innovation and
investment. The cost of this package is not to due
be covered until 2014, through spending cuts and

Structural and fiscal measures: France Update

Chart 8: French public sector debt

tax increases (including a rise in VAT) amounting

to EUR 10 billion in each case. The new tax charge
applicable to French companies for the rest of 2012
and 2013 is likely to balance out these cost savings,
however, with the result that the overall effect is
likely to be marginal.

% of GDP
5.0
4.0
3.0
2.0
1.0
0.0
1.0
2.0

In addition, French Prime Minister Ayrault

announced a further 35 measures in his Pact for
Growth, Competitiveness and Employment at the
start of November 2012. Most of these had already
been proposed in the Gallois Report, including
measures to create jobs, to promote education and
innovation or reduce bureaucracy, with the objective
of making the countrys economy more competitive.
The French government also wishes to save EUR 60
billion in state spending. The aim here is to reduce
the proportion of this expenditure relative to GDP
from its current level of 56% (one of the highest
within the Eurozone) to 53% by 2017. By comparison, Germanys government spending is 46% of GDP
(see Chart 7).

3.0
4.0

2000

2002

2004

2006

2008

2010

2012

% of GDP
100
90
80
70
60
50
40
30
20
10
0
2013

Gross Government Debt ( % of GDP, rhs)

Current Account Balance (% of GDP)

Source: Datastream, Allianz Global Investors Capital Markets

& Thematic Research, July 2013.

Second, the country could run into problems getting

its sovereign debt under control on a long-term
basis. According to estimates by the International
Monetary Fund (IMF) and the European Commission, national debt is 90% of GDP in 2012 (see chart
8). This is the threshold at which the US economists
Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff consider it could have a negative
impact on the growth rates for an economy over the
long term (>5 years) and it is rising..6 In comparison, national debt was just over 20% of GDP in 1980.

Structural reforms appear necessary for several reasons. First, France might find it difficult to reduce its
budget deficit (which was revised upwards for 2012,
from 4.5% to 4.8% of GDP) to the Maastricht criterion of 3% in the coming years. The EU Commission
forecasts budget deficits of 3.9% and 4.2% of GDP
for 2013 and 2014, respectively. The Commission
therefore granted France a further two years to push
the deficit below the Maastricht limit of 3% of GDP.

Source: Carmen M.
Reinhart, Vincent R.
Reinhart, Kenneth S.
Rogoff: Debt Overhangs: Past and Present, April 2012.

In view of the deterioration in the long-term economic outlook for growth and the budget as well as
the continuing loss of competitiveness, the rating
agency Fitch also downgraded its triple-A rating
(best credit rating) for France in July 2013, following similar steps by Standard & Poors (S&P) and

Chart 7: France general government expenditure One of the highest within the Euro area
58 %

0%
1 %

56 %

2 %
3 %

54 %

4 %
52 %

5 %
6 %

50 %

7 %
48 %

97

98

99

00

01

02

03

04

General Government Revenue France in % of GDP

General Government Balance France in % of GDP (RH)

05

06

07

08

09

10

11

12

8 %

General Government Expenditure France in % of GDP

Source: Datastream, Allianz Global Investors Capital Markets & Thematic Research, July 2013.

Chart 9: Frances expected refinancing volume in 2014 and 2015

bn EUR
60

50
40

30

20

10

0
Jan.
2014

Feb.
Mar.
2015

Apr.

May

Jun.

Jul.

Aug.

Sep.

Oct.

Nov.

Dec.

Source: Bloomberg, Allianz Global Investors Capital Markets & Thematic Research, July 2013.

Moodys. This downgrades Frances creditworthiness

by one level and the outlook remains negative.
When seen in the context of Frances refinancing
requirements in the next two years, it could result in
rising interest costs and make efforts to get a grip on
the budget deficit more difficult.
High budget and current-account deficits might
make it more expensive for France to refinance its
debt on the capital market in the coming years
particularly in view of the fact that France will have
to raise almost EUR 170 bn during the remainder
of 2013 and about EUR 380 bn in 2014 and 2015
(see chart 9). This total amount may be subject to
change, since possible revisions to budget deficits
could increase the countrys refinancing requirements even further.

Although the structural reforms that the French government has recently undertaken are a step in the
right direction, further reforms will probably be necessary to guide the French economy out of recession
and onto a competitive path of growth.

Imprint
Allianz Global Investors Europe GmbH
Bockenheimer Landstr. 4244
60323 Frankfurt am Main
Global Capital Markets & Thematic Research
Hans-Jrg Naumer (hjn), Dennis Nacken (dn),
Stefan Scheurer (st)
Data origin if not otherwise noted:
Thomson Financial Datastream.
Calendar date of data if not otherwise noted:
August 2013

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not
indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a
recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication.
Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed
for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not
permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered
by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the
U.S. Securities and Exchange Commission (SEC); Allianz Global Investors Europe GmbH, an investment company in Germany, authorized by the German Bundesanstalt
fr Finanzdienstleistungsaufsicht (BaFin); RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; Allianz Global Investors
HongKong Ltd. and RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the
Monetary Authority of Singapore [Company Registration No. 199907169Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments
Business Operator; Allianz Global Investors Korea Ltd., licensed by the Korea Financial Services Commission; and Allianz Global Investors Taiwan Ltd., licensed by Financial
Supervisory Commission in Taiwan.