How will France fare in 2013?

The French economy is currently in quite a weak position; its overall debt position is among the weaker ones in Europe, while the budget deficit is running at 4.5%. These are not insurmountable issues, but they need to be addressed, and hence the market was surprised when François Hollande was elected President in May on a platform of growth and spending. Investors have been concerned that a greater reliance on tax increases than expenditure cuts to close the budget shortfall could fail and cause conflict with counterparts in Berlin. But the fact remains that Europe is committed to a path of economic reform – and regardless of Hollande’s domestic agenda, he has limited flexibility to work differently.

Hollande has correctly tried to move to a more growth-oriented route to reform, but efforts to keep debt down will continue at the same time. This started in the fourth quarter when competitiveness measures were announced for French businesses, including certain tax incentives. Next on the agenda is labour market reform, which will not be easy in France with its powerful trade unions. However, given that France has one of the highest labour costs in Europe, we expect reductions in red tape and a simplification of labour laws at the very least. Following that, most likely in H2 2013, the government will tackle pension reform. We believe the result, similar to many other developed economies, is that there will be a prolonged period of deleveraging, which will leave GDP growth fluctuating around zero. However, if this commitment to reform holds firm we could see France, along with the rest of Europe, emerge much stronger than countries that are not facing up to their issues.