Mr Sarkozy inherited a large and diversified French economy with strong domestic demand and high productivity levels. Mr Sarkozy’s inability to tackle labour market rigidities and his unwarranted spending policy to the financial crisis has caused French debt metrics to significantly worsen in the last years. In 2010 deficit ratios reached 7%. As a consequence of France’s excessive recovery plan and Mr. Sarkozy’s fiscal expansions (Car scrapping schemes, bank capitalisations etc.) France has earned the highest debt ratio (83%) compared to their Aaa peers.
The future holds immediate challenges and France is required to play a particularly tricky role. Their future growth projections are decelerating and discouraging by even weak OECD standards. Additionally, an ageing population will add to long term expenditure demands.
To add to the mix, France is required to act like Europe’s guardian, but in reality they can barely stand on their own two feet. This guardian is weak and does not have the underlying strength to raise confidence in already shaken investors. Europe and any investor holding European bonds is hoping that Germany and the Bundesbank agree to loosen conditions on the ECB – allowing them a more aggressive approach without being constantly undermined by Germany.
It is obvious who the real Guardian of Europe is, and if Mr. Sarkozy can do anything good for Europe, it will purely be to persuade the Germans to allow the ECB a more active and aggressive role in bond purchasing. Let us hope Mr. Sarkozy’s persuasion skills are better than his fiscal management.
