France, Europe’s Second Largest Economy, Officially in a Recession

Recession continues in many European Union Member States Photo: http://www.flickr.com/horiavarlan

Recession continues in many European Union Member States
Photo: http://www.flickr.com/horiavarlan

The recent announcement by the INSEE (National Institute of Statistics and Economic Studies) that France is “officially” in a recession has the French wondering just how serious the economic situation has become. Investment and exports are both on the decline, and household consumption is at its lowest in the past thirty years. All together the economy fell by 0.2% of GDP in the first quarter (January to March). The economy shrank by the same amount in the fourth quarter of 2012.

The eurozone, comprised of the 17 member states of the European Union, is in its sixth consecutive quarter of recession, which is longer than the recession that engulfed the region after the 2008 financial meltdown in the United States. Eurostat also cited that this is the first time in the European Union’s 14-year history that economic contraction has persisted for six consecutive quarters.

France is not alone. Spain, Italy, and the Netherlands have also seen continued economic decline. All together, eight countries in the eurozone are currently in a recession. Even Europe’s economic powerhouse, Germany, only grew by 0.1%, which was lower than expected.

The grim economic news came on the day of President François Hollande’s first anniversary as president earlier this month. To add insult to injury, he currently holds the lowest approval ratings of any modern-day French president. At a press conference held during his visit to Brussels, Hollande speculated that the French economy would not grow in 2013, but that “we are past the worst.” Hollande urged France to follow a steady pace of reforms, saying that the country is on a good track and citing the list of measures his administration had already adopted including the competitiveness pact, reform of the labor market, and banking reform.

He attributed the difficult economic reality throughout the whole of the EU to what he called France’s “sickness.” He blamed austerity measures and the wrongs of the previous administration as the cause of France’s steady economic decline.

France is breaking other historical records this year, namely its unemployment rate, which stands at 10.6%, accounting for about 3.22 million people. While at a 16-year high, the unemployment rate in France is still far from the rates of 27% in Greece and Spain. Other problematic areas include low business confidence and lack of investment.

Many economists and Hollande himself proclaim that the country’s lack of competitiveness is the most crucial hindrance to the growth of the economy. Hollande has made it clear that he will prioritize competitiveness over France’s budget deficit, which is expected to be 3.9% of GDP this year. The European Commission has granted France a two-year delay, until 2015, to reach the target of below 3%.

French Finance Minister Pierre Moscovici followed the same line of thought, saying that the EU should focus more on growth rather than the states’ budget deficits. In a press conference, he announced, “Now we must strengthen our economic systems, mobilize all of our energy to create jobs and to ensure that we have an economy that is more flexible, more competitive, more responsive, more creative, and more innovative.”

The harshest consequences of the recession will fall in employment. Sluggish growth will also be of no help for France’s massive budget deficit as the recession will adversely affect tax revenues, forcing more budget cuts. The psychological effect of a recession can lead to uncertainty in the household and decreased spending. Some economists advise that France should accept a free trade agreement with the United States as a way to bring back the economy, at least temporarily.

While the French are trying to maintain “a good pace” with their reforms aimed at economic recovery, their American friends on the other side of the Atlantic are criticizing France and the entire EU for their slow response to the economic situation. The European Union is the world’s largest market, and the economies across the world have felt the effects of European recession.

Despite Germany’s position as the largest economy in the EU, the German government will most likely hold off on any serious attempts action as national elections are approaching in September of this year, which may hold back recovery across the eurozone further.

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