Germany to study status of French economy

Written by Reuters | Berlin | Updated: Nov 10 2012, 09:16am hrs
German finance minister Wolfgang Schaeuble has asked a panel of advisers to look into reform proposals for France, concerned that weakness in the euro zones 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. Schaeubles request denotes growing concern in Berlin and among private economists over the health of the euro zones 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 labour 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 ministers 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.

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 neighbour 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 labour 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 labour costs.

Economists said Hollande was sending the correct signal but that it may not be enough. Unlike European peers Italy and Spain, Frances 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% 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.