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French report
by Euro Reporter
2014-08-26 11:47:36
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France's François Hollande asks prime minister to form new government

France's President François Hollande dissolved his government Monday after a public quarrel within his cabinet over how to cure the ills of the euro zone's second-largest economy. The government shake-up—the second in less than five months—underscores the difficulties Mr. Hollande has had in rallying Socialist Party heavyweights, as well as his parliamentary majority, to a new, pro-business platform aimed at reviving France's stagnant economy. The divisions come amid growing discontent across the euro zone with painful belt-tightening measures to meet deficit targets and repair public finances. The open discord came to a head over the weekend after Economy Minister Arnaud Montebourg —who hails from the left wing of Mr. Hollande's Socialist party—said that budget cuts backed by the French president were choking both French and broader euro-zone growth. He called on France to reject the "trap of austerity" he said Germany was imposing across the Continent. Mr. Hollande responded to the dissent by asking current Prime Minister Manuel Valls to form a new government that is "coherent with the direction he himself has defined for the country," the Élysée presidential palace said in a statement.

Mr. Montebourg said he wouldn't seek a new post in the government. Education Minister Benoît Hamon and Culture Minister Aurélie Filippetti, who had both sided with the economy minister in criticizing the president, also said they didn't wish to be part of the next cabinet. Tolerating Mr. Montebourg's criticism could have allowed Mr. Hollande to maintain some support from the leftist side of his party. But keeping the outspoken minister in the cabinet risked jeopardizing the delicate European diplomacy Mr. Hollande is conducting to win more time to meet European Union deficit targets. The French president is trying to persuade his euro-zone counterparts, particularly Germany, to slow the pace of budget deficit reductions with pledges to adhere to a package of spending cuts and other pro-business measures. Mr. Hollande's success or failure in reining in the Socialist political family could have far-reaching repercussions. Without a majority in Parliament, the new government could run into problems as soon as next month, when lawmakers begin debates over next year's budget. "Politically it's going to get even noisier and even more difficult," said Famke Krumbmüller, a France analyst at political-risk consultancy Eurasia Group. The team Mr. Hollande appointed in March was meant to be a more cohesive group that would respond to a stinging defeat of the Socialist party in local elections. But the economic and political results have been poor.

About 40 lawmakers abstained from voting on a three-year plan for public finances in April, arguing that Mr. Hollande's plans were too generous for business and too punitive on public spending. Though the president proposed sweeteners in the form of tax cuts for households, the moves have failed to assuage the critics. His opponents within the Socialists' left wing were emboldened when data this month showed prolonged economic stagnation and a further contraction in business investment, despite a first round of Mr. Hollande's tax cuts for companies. The president's popularity has been in free fall. Only 17% of French people surveyed in an Ipsos poll last week said they approved of his policies. The score is the lowest for a French head of state since the monthly poll began in 1996. The result also revealed a significant gap between Mr. Hollande and Mr. Montebourg, who scored a 33% approval rating. Mr. Montebourg, who was promoted in the cabinet shuffle in the spring, said in a speech at a Socialist gathering Sunday that the French government needed to acknowledge it had failed to deliver on its promises and to look for alternatives. "I have asked the president of the Republic for a major shift in our economic policy," Mr. Montebourg said. The argument between French leaders comes as the debate over how to repair euro-zone economies has resurfaced across Europe. France and the broader euro-zone's economic stagnation in the second quarter has prompted some to rethink the prescription of austerity as a cure for debt-ridden economies in the euro-zone. European Central Bank President Mario Draghi touched on the debate Friday, saying that policy makers should use the flexibility in budget rules to "better address the weak recovery." Yet Mr. Montebourg's confrontational approach left Mr. Hollande—at heart a consensus builder—with no choice, said Pascal Perrineau, a professor at the Sciences Po university in Paris. "He's been obliged to discover what it means to be the president of the fifth Republic: it's an authoritarian role," he said.


Petrol prices falling faster in France

The cost of petrol is falling in the UK, but price cuts are still lagging far behind France, the AA has said. Holidaymakers driving on the Continent this summer enjoyed savings of up to 6.6% while drivers at home only saw the price of fuel fall 2.7%.  In France the pre-tax cost of petrol fell 5% between July 7 and August 11 this year.  The UK also lagged behind Holland, where prices fell 6.6%, Belgium at 6.3% and 4.7% for Spain, while drivers in Germany and Austria enjoyed falls of around 3.6%, the AA said. It revealed that the price of fuel at the pumps has fallen near to a three-year low with an average price of 129.72p a litre in mid-August. This was 1.89p a litre lower than in mid-July and was very close to the three-year low of 129.18p, set in February this year.

The mid-August UK average diesel price was 133.94p a litre - down 2.14p on a month ago and the lowest figure since February 2011. The AA said supermarket price cuts could drive average petrol prices down further. But AA public affairs head Paul Watters warned the UK had been left “lagging behind” other European countries. He said: “Last week, UK holidaymakers driving on the Continent were enjoying the savings of lower European wholesale prices. Those who holidayed at home didn't." Across the UK, Northern Ireland's average of 130.6p a litre is currently the most expensive for petrol. Northern Ireland is the only part of the UK still above 130p a litre.

Yorkshire and Humberside remains the cheapest for petrol this month, averaging 129.4p a litre. East Anglia, averaging 134.5p a litre for diesel, knocks Scotland at 134.4p off its normal position as the UK's most expensive. Drivers across northern England are enjoying the cheapest diesel, with the North, North West and Yorkshire and Humberside all level at an average of 133.5p a litre.


You are the weakest link

All is not well in the Eurozone, neither economically or politically. Its previously anaemic rate of economic recovery is stalling with flat GDP growth in the second quarter, inflation is worryingly low, productivity is weak, its financial system is fragile and its banks are undercapitalised. Furthermore, Europe faces negative headwinds from the crisis over the Ukraine and the volley of tit for tat sanctions with Russia. Discontent with European institutions is widespread, reflected in the rise of anti-EU insurgent parties in this year's European parliament elections. While the negative headlines surrounding the European Union have long been dominated by the woes of ‘peripheral' Europe - Portugal, Spain and Greece - it is France that increasingly poses the biggest threat to the Eurozone. France and Germany, the countries with the two largest economies on the Continent, have been the key drivers behind the whole European project and the destiny of the EU is integrally tied to the fortunes of France. Those fortunes are on the wane.

There is little question now that France is now the ‘sick man of Europe' and many of its wounds have been self-inflicted. It has resisted structural reforms, its political elite resisting the Anglo-Saxon capitalist model. The economy of the Fifth Republic has been crippled by the disastrous socialist policies of Francois Hollande, including a punitive 75% top rate of tax, a totemic act of economic self-immolation. These policies have frightened businesses from hiring and driven swathes of entrepreneurs, professionals and celebrities abroad. The French economy is stagnating, enduring two quarters of zero growth and unemployment is at an all-time high. That's painful for the French, threatening social cohesion and fuelling deep resentment towards its political elite and also European institutions. It is also a drag on other countries within the Euro-bloc whose economies have significant trade exposure to France. Absence of growth means France humiliatingly had to admit it cannot meet its debt reduction target this year. This will both weigh on France's flagging credit worthiness and also potentially jeopardize the commitment to painful fiscal discipline elsewhere in Europe. A France that unravels economically and in its commitment to the EU, could arrest the march towards European integration at a time when others, notably the UK's David Cameron, are arguing for a repatriation of powers to member states.

For investors, the outlook for European equities could be a crossroads. A year ago many professional investors sighted a valuation anomaly in European equities but to a considerable degree that has now closed. Given this and the weak macro-outlook, the key drivers of European equities from here will be the next set of moves by European Central Bank (ECB) which has operated a tighter monetary approach than other major central banks. The case for more aggressive monetary stimulus measure is mounting, which could culminate in full-blown QE. This would likely weaken the Euro and support European equities. However, that isn't a given.


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