French President Francois Hollande delivered an impassioned speech before the European Parliament in Strasbourg today decrying the strength and volatility of the euro exchange rate. This was the best indication that Hollande is feeling political heat because of France’s poor economic performance. The result is he has joined the periphery to urge the ECB and Germany to adopt monetary and fiscal stances that promote growth.
Hollande explicitly warned that the euro’s strength would harm fragile economies in Europe. L’Expansion quoted him as saying that the euro “cannot fluctuate according to the whims of the market. A monetary zone needs to have a policy of change because if not it will see an exchange rate imposed that does not correspond to the actual state of its economy.”
I see this is another salvo in the currency wars. The ECB is losing the currency wars right now – in large part because the risk on trade for euro zone sovereign debt has increased the appetite for euro-denominated assets and caused the currency to appreciate. The euro’s path over the last twelve months has been highly correlated to the situation on the ground in European sovereign debt markets, with the euro gaining strength in the wake of Mario Draghi’s “whatever it takes” speech n July 2012. The problem here is that this is killing peripheral economies that need a release valve to balance their program of austerity-led internal devaluation. External revaluation is not that balance. Therefore, there is greater pressure on the ECB to do something to stop the euro from appreciating and strangling European economies.
France is in the hot seat here because its PMI numbers are awful and its deficit target for 2012 is dependent on its economy growing 1.7% this year, something that won’t happen. That means that France will miss its targets and this could put the country’s sovereign yields in grave danger. I believe France is much more akin to Spain than market yields now suggest and that French yields will be susceptible to a housing crash-induced banking and economic crisis given the levels of over-valuation in the French housing market. For this not to occur, France needs growth and this is why Hollande has joined the periphery in calling for more growth-oriented policies.
Recently, Spanish Prime Minister Rajoy made a show of solidarity with German Chancellor Merkel who backed him despite his domestic problems involving illegal political payments. Merkel lived through a similar scandal in her party over a decade ago, her anti-corruption stance being exceedingly helpful in her being able to take over the party’s leadership reins. Yet, at the same time, Rajoy is pleading with Merkel to amp up the German domestic economy as a counterbalance to the collapsing demand in Spain due to its government’s austerity. Hollande has joined Rajoy in this effort and should be seen as fully on the side of the periphery ideologically regarding ECB monetary policies and the stance on core fiscal expanionism.
The reality is that Germany is concerned about its own public finances. I don’t see any chance that Merkel will relent and increase spending when the rumour is that her finance minister has secret plans for austerity that have been accelerated due to Germany’s recent dip in economic growth.
The bottom line here is that while France has officially joined the periphery in the currency wars and on core euro zone fiscal policy, neither Germany nor the ECB is likely to ease policy and so France will end up having to make additional cuts to meet its deficit targets. If you combine these cuts with the likely negative credit accelerator from housing, you can see problems for France. I believe these factors will soon be reflected in sovereign bond yields backing up with spreads widening to Bunds. Spain, France and Portugal are the three countries to watch for widening spreads due to economic under-performance. Greece is the country to watch for tightening spreads.
Below are related articles in French and English.
“the data showed a continued divergence between the euro zone’s powerhouse economy Germany and that of neighboring France that will worry policymakers.
The German PMI chalked up its biggest one-month rise since August 2009, soaring to its highest since June 2011, while the reading for the bloc’s second-biggest economy France plummeted to its lowest in nearly four years. The French services PMI was even below readings from perennial laggards Spain and Italy.”
As you may have seen in English-language articles, Francois Hollande gave a speech before the European Parliament decrying the strength and volatility of the euro exchange rate. This is another salvo in the currency wars in which there is greater pressure on the ECB to do something to stop the euro from appreciating and strangling European economies. France is in the hot seat here because its PMI numbers are awful and its deficit goal is dependent on its growing 1.7% this year, something that won’t happen.
This article in L’Expansion is on the de-industrialisation of France. The article says that the closure of factories in France rose 42% in 2012 representing a loss of 24,000 jobs. Since 2009 1000 factories have closed and 700 have opened. Clearly there is a lot of angst in France about the economy, as seen through from articles like this.
“It cannot be long before economists in France, Italy and Spain contemplate a vision of the eurozone without Germany. The heartfelt plea on Tuesday from French president François Hollande for a lower exchange rate illustrates the power of the German economy and its influence on the euro.
Nearly all the major economies of the eurozone are heading in the same direction as Portugal and Greece. Surveys of the services sectors in France, Spain and Italy on Tuesday were shocking, and must lead to higher unemployment and lower GDP growth over the coming year.”
“The good news, in other words, is that the euro-zone economy continues to shrink, albeit at a slower pace. Digging into the figures, it is clear that there is some legitimately good news. German activity showed an outright expansion in January and contraction in Spain has slowed dramatically from late last year. But Italy is merely treading water, and the recession in France—the euro area’s second-largest economy—is rapidly deepening in a very discouraging sign.
Movements in bond yields add to the troubling French picture. When markets move to more of a “risk on” position, French yields rise. German bunds do the same, but Germany’s debt picture is less troubling and its economy is more robust. Too much optimism in Europe could tip France toward peripheral status.”
“François Hollande has issued a clear warning that the current strength of the euro could damage the fragile economic recovery in Europe, calling for international action to stem currency distortions.
“The euro should not fluctuate according to the mood of the markets,” the French president told the European parliament in Strasbourg. “A monetary zone must have an exchange rate policy. If not it will be subjected to an exchange rate that does not reflect the real state of the economy.””
Francois Hollande has just announced that he believes Europe is condemning itself to an austerity without end and has called for France’s deficit targets to be relaxed. Additionally Hollande as asked Germany to provide more economic stimulus as counterbalance. Clearly France and Spain are now joining forces against Germany.
“Labour market data from Germany was again impressive. Unemployment has fallen to a 20-year low of 6.8%, not bad for a country that is heavily reliant on exports and thus exposed to the slowdown in the global economy in the second half of 2012. Meanwhile, France reported flat consumer spending in the final three months of 2012, with all the signs pointing to another weak performance in the first quarter of 2013. The jobless rate in France is at a 15-year high and on course to hit 11% later this year.
Make no mistake, neither country is going to have a 2013 to write home about. But should the eurozone crisis flare up again over the coming months, there is a real risk that its second biggest economy will be added to the list of countries where the public finances are deemed unsustainable.”