France and Spain Reverse Economic Fortunes

 

One year ago, when Spain's Mariano Rajoy travelled to Paris to meet France's Francois Hollande for their annual bilateral summit, only one question was on the agenda: if and when Spain would seek a European bailout for its crippled public finances.

As the Spanish PM and the French President prepare to meet again in Madrid on Wednesday afternoon, many believe their countries have reversed roles.

Of course, there is no question of France requesting any international bailout, and Spain has not shaken off all its woes, but the mood and the economic momentum have shifted across the Pyrenees.

Thanks to resolute action to pass harsh economic remedies and tough spending cuts, and steps by central banks in Europe, the US and Japan to head off the crisis, Spain has managed to kick-start its economy at a time when French economic activity and reforms are stalling.

French business activity shrank in November after eking out growth for 2 months and exports are languishing as high unit labour costs eat away its competitiveness and key reforms are delayed. But some analysts point out that France has stronger economic fundamentals in the long term.

Spain emerged from its 2-year recession incQ3 and is on track to grow again, albeit at a slow pace, in the last 3 months of the year.

It has regained part of the competitiveness lost during a decade-long property boom fuelled by cheap credit and which ended in a €41 Bln rescue of Spanish banks last year.

As a result, exports and foreign investment are on the rise and the Spanish government is on track to register a net lending position against the rest of the world for the first time in decades.

Spain, which recently overtook its northern neighbour as Europe's 2nd-biggest carmaker, moved from having a trade deficit with France of more than €6 Bln in 2007 to a first surplus of about €1.5 Bln in 2012.

Rajoy, who has spent most of 2013 fighting corruption allegations at his Partido Popular and trying to extinguish growing calls for secession in Catalonia, is now pushing hard the line that the worst of the crisis is over and Spain will soon surprise on the upside.

Promoting Spain, Rajoy had achieved a degree of success.

The Madrid government revised up its 2014 growth forecast to 0.7% from 0.5% previously and Rajoy's PP was up in a November official opinion poll, breaking with 2 years of continuous falling support but still way down from its level in the November 2011 elections.

SPAIN FLOURISHES, FRANCE STRUGGLING ?

Spain's upbeat message widely contrasts with France's depressed mood and many analysts now say Spain might become the euro zone's success story with France turning into a growing worry for its European partners.

In another sign of a diverging trend between the t2 countries, Standard & Poor's cut France's credit rating earlier this month by one notch to AA from AA+, giving a thumbs-down to its economic policies, while Fitch revised the outlook on Spain's BBB rating to stable from negative.

France's rating is still much higher than Spain's but, coming just a few days apart, the 2 moves highlighted a different attitude towards the two neighbours.

With the French economy slipping into negative territory in the third quarter, Hollande's approval rating fell this month to a record low of 15%, according to a Yougov survey.

This, however, is only one part of the picture and there are reasons to consider the euro zone's 2nd-largest economy as a stronger proposition in the longer term.

"There's a readjustment of opinion following the irrational fears 2 years ago that it was game over for Spain ... As often in such cases consensus is moving a little too fast," Deutsche Bank European economist Gilles Moec said.

France's banks, unlike those of Spain, have needed no bailout to weather the global financial crisis and euro zone debt storm. Its political and economic clout due to its size and its U.N. Security Council seat mean it can pull its weight on the international stage.

A much bigger economy of €2 trillion compared to €1 trillion for Spain, no real estate crisis, no major debt problem for households and a bigger number of world-class blue chips speak in its favour.

For most of 2013, France has secured debt yields 200-basis-point lower than what Spain pays to issue its 10-year paper and its recent track record on cutting the deficit, curbing debt, securing higher credit ratings and limiting the rise in unemployment has also been better.

And the number of French jobless is expected to remain stable over the next 2 years at about 10%, a high level but far from a Spanish unemployment rate of more than 25% which is not expected to start falling until 2015 as growth remains elusive.

SAME REFORMS, DIFFERENT PERCEPTION

The European Commission forecasts the Spanish economy will contract by 1.3% this year and then grow by 0.5% in 2014 and 1.7% in 2015.

France's GDP, in the meantime, is seen expanding by 0.2% in 2013, 0.9% in 2014 and 1.7% in 2015.

The EU executive, worried by the 2 countries' lack of growth, earlier this year gave them two extra years to cut their deficit below the European ceiling of 3% of GDP and asked them to use this time to reform their economies.

Despite being from different political families, the reform roadmap of centre-right Rajoy and centre-left Hollande look similar on paper, as new pension, tax and labour laws are in the making in Paris and Madrid.

One major difference, however, has been Rajoy's zeal at using his strong majority in parliament to have Spain taking Germany-inspired austerity medicine, when Hollande, who also enjoys a parliamentary majority, has dug in his heels.

This has lead to diverging public perceptions.

"The problem for France is more that the tidying of public finances is done without structural reforms," Moec said. "Spain had its back to the wall, there were no other options. In France it's flabby and gloomy. It's not Greece, it's not Spain, but it's not working.