As the sovereign debt crisis continues to worsen due in large part to incompetent leadership, more attention is being given to France.
Similar to the case seen in the U.S., the decline in domestic demand in France accounted for most losses in output during the 2008 financial crisis.
In contrast, the decline in net exports accounted for the bulk of output losses in Germany. Thus, the crisis-related damage was entirely demand-driven for Germany.
Moreover, while France suffered a more moderate decline in output during the trough of the crisis, its recovery has also been more tepid. Indeed, while both output in Germany and the U.S. had surpassed their pre-crisis levels by 2011 Q1, France still had not by then fully recuperated its output losses associated with the crisis and the recession. The fact that France experienced larger domestic output losses due to the crisis for a more prolonged raises the possibility of more lasting damage to the economy.
It is widely accepted that the finance, insurance, and real estate sectors tend to suffer most losses during a supply-driven shock. Unlike some other countries with severe permanent losses in certain sectors, no sector in the French economy has suffered such a loss by the global recession.
Like Germany, the finance, insurance and real estate sectors in France suffered relatively little destruction during the financial crisis. These sectors have already attained the pre-crisis output levels by end-2010, although they have recently declined in the face of the EU crisis.
In contrast, the U.S. experienced a maximum decline in these sectors of almost 8% during the crisis and has not yet recovered from these losses.
During the financial crisis of 2008 and thereafter, consumer and business credit showed a nice uptick in France and Germany, unlike the case seen in the U.S.
In past issues of this publication, I have discussed pension reform (see “Pension Risk Parts 1-3” from the Intelligent Investor) in the U.S. and Europe. While many of the reforms have been passed in Europe, discussions are ongoing.
One of the primary goals of pension reform in Europe (aside from lowering expenditures) was to boost labor force participation through the elimination or expiration of incentives that encourage early retirement, along with other features that have reduced Europe’s labor force participation over the years. I detailed Europe’s trend of chronically low labor force participation in a previous analysis (see “Europe’s Deflationary Future” from the Intelligent Investor).
The remainder of this report, as well as an overview of the global economy, with detailed analysis of Japan, Italy and the U.S is contained in the October Global Economic Analysis report. This report is 60 pages and can be purchased here.
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