Standard & Poor’s downgrade of France’s credit rating comes as another wake-up call to President Francois Hollande and his government, says J.P. Morgan.
Last week, Standard & Poor’s (S&P) downgraded France’s credit rating for the second time in two years, from AA+ to AA with stable outlook.The reason behind the downgrade was on economic policy.
France was downgraded because high unemployment in the country was making it hard for the government to make important reforms to increase growth.
S&P believes that the government’s reforms to taxation, as well as to product, services, and labor markets, will not substantially raise France’s medium-term growth prospects. In addition, ongoing high unemployment is weakening support for further significant fiscal and structural policy measures.
S&P expects government debt to hit 86% of gross domestic product (GDP) in 2015 and unemployment to remain above 10% until 2016.
According to J.P. Morgan Market Insights, the evolution of French exports, which accounted for 27.4% of its GDP at the end of 2012, clearly illustrates France’s relative lack of competitiveness.
“France’s exports have lagged those of other European nations since 2007. The 0.7% decrease in September’s manufacturing production reported on Friday comes as a confirmation that French industry is losing momentum. Against this backdrop, unemployment has increased by 1.2 million since mid 2008, bringing the unemployment rate to a new high of 10.9% in September”, says Vincent Juvyns, executive director of J.P. Morgan.
France will also have to continue to take measures to bring its budget back within Maastricht criteria. According to Juvyns, France budget deficit was 4.1% of GDP in 2013 and a gross debt-to-GDP ratio is expected to reach 100% by 2015.
France’s tax policy is also on the wrong track.
“So far, France has mainly put the emphasis on higher taxes rather than spending cuts, but this approach has resulted in a tax burden that currently stands at around 48.5% of GDP and one of the highest in the developed world, putting business and consumer confidence under pressure”, says Juvyns.