Lagging France is 'threat to eurozone'

By  Szu Ping Chan

France's glacial pace of reform could push the eurozone to "breaking point" if another crisis hits the 18-nation bloc, a leading think tank has warned. 

The Centre for Economics and Business Research (CEBR) said that although the rest of the eurozone – including peripheral economies of Portugal, Italy, Ireland, Greece and Spain – was heading towards a tentative recovery, France's big budget deficit, stubbornly high unemployment and chronic competitiveness problem meant Europe's second-largest economy was at risk of being plunged into another crisis, with grave consequences for the rest of the currency area. 

"The risk that the French economy will lag behind its neighbours in enacting reforms is not a trivial one," said Danae Kyriakopoulou, an economist at the CEBR, and co-author of the new report. "Though the troubles of the region's periphery have so far proved manageable, a crisis in [France] could have dramatic consequences for the viability of the currency union and push the eurozone to breaking point." 

French president François Hollande has introduced a sweeping package of supply side reforms aimed at boosting productivity and reviving growth. Earlier this year, he announced a multi-billion euro package of spending cuts he said would pave the way for a reduction in business taxes. 

However, his popularity has plummeted since his election two years ago amid record joblessness, with 3.4m people now unemployed. Meanwhile, the budget deficit, at 4.3pc of gross domestic product, remains well above the European Union limit of 3pc. 

Ms Kyriakopoulou said "low political capital" among French politicians had delayed fiscal consolidation. However, there was little room left for manoeuvre. "France has come under a lot of pressure from the EU already. At some point there will be nowhere left to kick the can, so they'll have to do something," she said. 

The think tank expects the French economy, which stagnated in the first quarter of this year, to grow by almost 5pc over the next five years, compared with 4.6pc in both Italy and Spain. 

Britain, which is forecast to be the fastest-growing economy in the G7 this year, will expand by 7.7pc between now and 2019, the CEBR predicts, and eurozone powerhouse Germany is expected to grow by 9.2pc. 

Ms Kyriakopoulou said that even though the size of the French economy recovered to pre-crisis levels in 2011, long before the UK, GDP per person would not recover until 2016, a year after the UK, which only recently surpassed its pre-crisis peak. Greece and Ireland, which shrank massively during the financial crisis, are expected to grow by 15pc and 11pc respectively. 

Mario Draghi, the president of the European Central Bank, warned last week that the recovery in Europe remained "weak, fragile and uneven", with tensions between Russia and the West presenting big downside risks for Europe. 

The bloc is also dogged by the threat of deflation, which would make it harder for peripheral countries to reduce their huge debt piles, despite stronger growth. Inflation at present stands at only 0.4pc. 

The CEBR said that despite the "dynamic comeback" of countries such as Greece and Ireland, they would be haunted by the eurozone crisis for years to come. /Telegraph