Could it really be that the worst is already over for the euro zone? If you remember, towards the end of 2012, Greece was able to secure another bailout deal and removed the immediate risk of a default for the debt-ridden country. Meanwhile, Spain finally faced the music and asked for external funding.
Boosted by good news from the region, the euro has been able to rally until the start of 2013. I still find it too good to be true though. I often find myself wondering, will the rally last?
As of late, the euro has been rollin’ on the positive vibes brought about by the six-notch upgrade that S&P made to Greece’s debt rating as the country’s borrowing costs continue to fall. Of course, it also helps that markets are distracted worrying about the U.S. fiscal cliff.
Don’t get too caught up on the euro-phoria though. What most might not know is that another crisis could be waiting in the wings – a bigger one this time!
France, the region’s second-largest economy, is suffering more than any other member of the bloc as it loses its competitiveness. What sucks even more is that it has nothing to do to stop it!
A quick glance at the country’s headline figures might lead one to believe that everything is d’accord in the land of wine, cheese, and everything fancy. However, France’s products such as cars, steel, clothing, ad electronics, have become more expensive to produce domestically compared to acquiring them from Asia and its European neighbors.
Consequently, this is causing sharp drop in exports and significantly hurting the country’s manufacturing and services sectors.
Sure, France isn’t exactly teetering close to a debt drama at the moment but the fact remains that huge budget deficits can stem from a loss of competitiveness and lack of economic growth. A drop in demand for French products would translate to falling revenues and declining production. This could result in lower hiring and spending, eventually leading to a downturn in growth.
Now here’s the kicker: If the French government maintains its usual spending and borrowing habits in the midst of weakening economic growth, the gap between tax revenues and government expenses could keep widening. And that’s how a budget deficit is born, ladies and gents!
Note that this scenario already took place in Spain, Italy, and other debt-ridden euro zone nations. Most of these countries already started to adjust their government spending habits to prevent a full-blown debt crisis from taking place while France seems to be completely oblivious to this potential fiscal threat.
Of course many financial hotshots are confident that France is too big to fail, and they may be right. After all, French government 10-year bond yields are at 2%, just a few notches above Germany’s and miles away from the bond yields of PIIGS nations. This suggests that, if France needs funds to finance its government spending, it could easily source moolah from creditors.
On the flipside though, France could also be too big to save. Let’s not forget that France is currently the second largest euro zone nation in terms of economic growth. However, their annual GDP figure has been shrinking for the past few years from an average of 1.2% since 2009 to just 0.2% last year.
At the moment, it appears that everything is still fine and dandy in euro zone’s second largest economy as it remains to be seen when the French government will start to worry about a budget deficit. Let’s hope that Hollande and his men won’t panic then because things might not look too good for the euro otherwise!