France: Europe's headache

For the second time in two years, Standard & Poor's recently downgraded France's creditworthiness, with the country having lost its top rating earlier in 2013.

The agency's report said it was unlikely that France's reforms thus far would result in a mid-term stabilization of the domestic economy. The drop in credit worthiness has raised new fears: Is France going to be a second Spain?

Magnitude of problems

"That's probably going too far," says economist Henrik Uterwedde from the German-Franco Institute(dfi) in an effort to set straight recent headlines. "It's no accident that France is the world's fifth-largest economy, and the second-biggest in Europe. Uterwedde does concede, though, that the French economy is not faring well.

French industry is being weighed down by international competitors, with youth unemployment at a record high and social systems threatening to burst at the seams. On the political end, required reforms are happening slowly.

"The government faces a bundle of problems, and that's what makes it so hard to act fast and in a way that's convincing," Uterwedde told DW. He argues that the decline in the French economy, which became apparent to everyone through Standard & Poor's downgrade, has been building over the past decade. All of which makes it all the more difficult, it seems, to find a cure now.

High public debt

Frederic Schaeffer is an editor at the French business paper "Les Echos." "On the one hand, the agency considered the nation's reforms to be insufficient," he told DW. High levels of public debt were also targeted, with the country's debt load amounting to 53 percent of gross domestic product (GDP) - matched in Europe by just a few.

France has repeatedly failed to meet EU deficit rules under which fresh borrowing must not exceed three percent of GDP. This year, it's expected to log a four percent deficit - despite tax hikes. As of 2015, public spending is to be cut in order to meet the three percent deficit target. S&P, however, has severe doubts about France being able to live up to its promise.

Sluggish industry

Growth, too, is sluggish, hampered by many companies' weak competitiveness, Uterwedde says. "Firms quite often produce rather low-key products - a Renault Twingo, for example, instead of a luxury car. With products like these, the cost pressures on markets are enormous."

He says companies can invest little in research and technologies as long as they make cheap products, and thus, innovation remains low.

Social system jeopardized

French companies have another headache as well: non-wage costs. The nation's social welfare system has a cumulative deficit of 25 billion euros ($33.8 billion). But cutting such benefits would result in a lower purchasing power, with consumption playing a major role in stabilizing the domestic economy.

And citizens are increasingly losing patience. The latest protests in Brittany have shown that people are fed up with tax hikes. The state appears too weak to assume the role of welfare underwriter like in Scandinavian countries.

Volatile labor market

Unemployment in Francestands at a record: just below 11 percent. Standard & Poor's believes it will stay above 10 percent until 2016. "Youth joblessness is twice as high," Frederic Schaeffer said. "And that's why most political measures are focused on that.

Ever since the summer months, the situation has eased to some extent. But reforms are expensive - in euros as well as political terms - leaving everyone wondering whether they'll be sustainable. Companies will only start employing more people when the economy picks up markedly.

For Henrik Uterwedde, rigid labor market structures are also a point of criticism. He does think, though, that French reforms are a milestone in the country's history in the sense that unions and employers have been involved in the process right from the start.

"If Hollande doesn't deviate from this path, and adds a couple of reforms, say, related to a social insurance overhaul, France could get back on solid ground," Uterwedde said.

He added that it's interesting to note that the downgrading of France's credit rating has left financial markets almost completely unfazed, meaning that the country is still able to borrow fresh money at rather favorable rates.

"In Europe, with the exception of German bonds, no other state [besides France] is considered safe."