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november 09, 2012 • 05:35 AM

Exclusive: Worried Germany seeks study on French economy - sources

German Finance Minister Wolfgang Schaeuble delivers his speech during the "German Economic Forum", organized by German weekly newspaper "Die Zeit", in the St.Michaelis church in Hamburg, November 8, 2012.
Foto: Fabian Bimmer / Reuters
 

German Finance Minister Wolfgang Schaeuble has asked a panel of advisers to look into reform proposals for France, concerned that weakness in the euro zone's second largest economy could come back to haunt Germany and the broader currency bloc.

Two officials, speaking on condition of anonymity, told Reuters this week that Schaeuble asked the council of economic advisers to the German government, known as the "wise men", to consider drafting a report on what France should do.

Schaeuble's request denotes growing concern in Berlin and among private economists over the health of the euro zone's second largest economy, which is set to miss a European Union goal for reducing its public deficit next year.

"Concerns are growing given the lack of action of the French government in labor market reforms," Lars Feld, an economist who sits on the panel, told Reuters.

Although Schaeuble raised the prospect of a report on France with members of the council this week, Feld and the finance ministry made clear that the government had not submitted a formal request. The ministry declined comment on "unofficial discussions" of the minister's affairs in general.

The panel of advisers publishes an annual report on the state of the German economy, which it handed over to Chancellor Angela Merkel on Wednesday. It can also draft special reports when it sees economic imbalances developing or at the formal request of the government.

Since being founded 49 years ago, the panel has published no studies on individual countries but Germany, according to its website. Its last expert opinion, the first since 1997, was published in July, following the European Union summit in June.

PRESSURE

French President Francois Hollande, in office for roughly half a year, is under intense pressure to reform an economy that is losing competitiveness relative to its larger neighbor Germany and southern European countries that have enacted far-reaching measures in the euro crisis.

This week, in response to calls by industrialist Louis Gallois for cuts in labor charges to reverse decades of industrial decline, the government announced it would grant 20 billion euros in annual tax credits to companies as a way of lowering labor costs.

Economists said Hollande was sending the correct signal but that it may not be enough. Unlike European peers Italy and Spain, France's borrowing costs have remained low, but investors worry its rock-bottom bond yields do not reflect the fragility of the economy.

A Bank of France survey published on Friday predicted French gross domestic product will shrink 0.1 percent in the last quarter of 2012, pushing France into a technical recession, defined as two consecutive quarters of contraction, as the third quarter is also expected to be negative.

Schaeuble has been a close ally of France and has argued firm ties are key to achieving more European integration, a persistent German demand to solve the problems of the euro zone debt crisis.

In August, he and his French counterpart Pierre Moscovici said they would launch a working group in order to make joint proposals on euro zone issues like fiscal and banking union.

The German "wise men" panel, which also includes a woman, is not obliged to take up Schaeuble's suggestion. One source said if it decided to do a study, it would likely do so in cooperation with a French institute, rather than on its own.

However, the panel has made clear it is concerned about France's economy. In its Wednesday report it touched on France, saying continued stagnation was a growing worry given the recessionary trends in the euro zone as a whole and voiced doubts that savings measures would suffice to consolidate the French budget.

"The biggest problem at the moment in the euro zone is no longer Greece, Spain or Italy, instead it is France, because it has not undertaken anything in order to truly re-establish its competitiveness, and is even heading in the opposite direction," Feld said on Wednesday.

"France needs labor market reforms, it is the country among euro zone countries that works the least each year, so how do you expect any results from that? Things won't work unless more efforts are made."

France and Germany have been at the core of efforts to stop the euro zone crisis spreading from the periphery to the larger economies.

While many have accepted twice bailed-out Greece is a special case, German officials say in private that they are concerned trouble in Spain and Italy could spill over to France unless Hollande takes bold steps. (Additional reporting by Sarah Marsh; Editing by Noah Barkin/Mike Peacock)

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