Europe’s giants are sinking

I’ve mentioned France a couple of times over the last year. When I talked about it last I stated:

High levels of public and private debt, a long running negative trade balance and current account deficit, stalling industrial production, GDP and employment along with significant banking sector exposure to the periphery all add up to a fairly risky predicament. This is certainly not a country that could take on a strict austerity regime without causing itself some significant short-to-medium term economic damage because it is obvious from the metrics that the private sector has been borrowing from both the external and government sectors for a long period of time.

As I mentioned in the case Spain, once the economy begins to slow, government sector revenues fall. If deficit cutting is a priority over growth then this inevitably leads to calls for further cuts in government spending and increases in taxation which, in the absence expanding private sector credit or offsetting growth in the external sector, leads to a further deterioration in economic growth. It is far too early in the case of France to suggest such a dynamic has taken hold but growth has certainly become a problem:

The French economy will shrink in the third quarter after stagnating for nine months, the country’s central bank said Monday, indicating the slowdown of the euro zone’s second-largest economy is intensifying.
The 2 trillion euro ($2.56 trillion) economy will shrink 0.1% in the three months to September, Bank of France said.
The forecast suggests France faces its first quarter of contraction since the country pulled out of recession at the start of 2009.
This puts further pressure on President Francois Hollande, who has vowed to kickstart the economy in an effort to make necessary budget adjustments less painful. In a televised interview last night, Mr. Hollande said the government had significantly cut its economic forecasts for next year–with growth now expected to be barely above zero this year, and reaching just 0.8% in 2013, much less than the 1.2% expansion forecast previously.

Read more: http://www.macrobusiness.com.au/2012/09/europes-giants-are-sinking/