France’s infighting over economic policy sparks EU concerns

France under microscopeThe French government must address its economy's "chronic" lack of growth potential, according to one fund manager following the weekend resignation of the economy minister, Arnaud Montebourg. Martin Harvey, fixed income fund manager at Threadneedle Investments, says France will struggle to implement the measures required to deal with this absence of economic growth, and says President François Hollande's lack of popular support can only make things worse. Harvey says France's resistance to aggressive fiscal consolidation has the potential to cause further disagreements at European level, particularly as the European Central Bank's (ECB) president Mario Draghi has shown support for greater fiscal flexibility. Harvey adds: "The French government bond market maintains a sense of calm regarding the disappointing growth outlook and political stresses, as investors are happy to accept the long-term structural risks for the added yield on offer versus German bunds. "However, we must be aware of the risks that given the current problems, and the apparent lack of a centrist solution, the French electorate continues to gravitate toward the extremes of the left and right wing. This would cause further problems for the European establishment." David Marsh, a financial specialist writing for the Official Monetary and Financial Institutions Forum, also forsees ideological clashes on the French horizon, anticipating that Hollande will come under "simultaneous attack" from both the right wing, including his traditional conservative rivals and the far-right Front National, and from his own socialist party. Marsh highlights this week's replacement of France's economy minister as a further sign that Hollande is looking "ever more vulnerable". Montebourg was replaced by Emmanuel Macron, one of the president's top advisers, in the hope of sending more positive signals to other countries in the European Union. France's second cabinet reshuffle in two years also saw culture minister Aurelie Filippetti and education minister Benoit Hamon replaced. Marsh says: "Hollande's unexpectedly speedy ousting of Montebourg over what the latter claims were German-inspired austerity policies is being greeted in Berlin as a positive clarification of France's determination to press ahead with reform efforts. "The German government is likely to take the line of least resistance over latest European discord on its policies of budgetary rigour, allowing some extra fiscal leeway for the embattled French and Italian administrations, while at the same time maintaining a longer-term drive for reforms and orthodoxy. "Yet, beneath the surface, tensions are building up that point to a deep-seated schism among these three principal members of economic and monetary union (EMU), which make up two-thirds of the GDP of the euro bloc." ©2014 funds europe

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