Show an investor France’s numbers without the name attached and they might think they were looking at an emerging market. High public spending, a generous welfare system, an ageing population and a debt burden that keeps getting harder to manage. Add regular clashes between protesters and police, and it is not a picture you would associate with a core eurozone economy.
France is not an emerging market but it is becoming an uncomfortable case study for Europe. What concerns me is what they say about the country’s ability to make hard decisions. Governments change, reforms are diluted or dropped, and the problems carry on as before.
An emerging market in this position can at least devalue its currency to regain competitiveness. France cannot. It is tied to the Euro which leaves fiscal discipline and structural reform. Both bring people onto the streets.
That is the trap. The political cost of reform is rising faster than the economic cost of delaying it. So reform gets postponed and the bill gets bigger. Meanwhile, businesses have to work around policy uncertainty, higher taxes and doubts about where the country is heading.
This does not stay inside France. It is one of the eurozone’s largest economies, and prolonged paralysis there adds to Europe’s uncertainty. Capital rarely leaves in a hurry. It just becomes more cautious when it cannot see a credible plan.
Markets can live with the next demonstration. What they handle less well is a slow loss of confidence in a country that cannot fix problems it has been looking at for years. France is not the next emerging market crisis but the warning signs are getting harder to ignore.