FINANCIAL ICEBERG

Always consider hidden risks

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MARKET INSIGHT

EU Competitiveness - a wish



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In the graph below, you can see the evolution of the unit labor costs in Europe from the year 2000. As we can observe, Greece and Spain have already started to manage their competitiveness trough a lowering of their unit labor costs. But as a surprise to us was that Italy and France were the worts performer in their of bringing their unit labor costs downward...​

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And if we do check the manufacturing competitiveness from the 2013 GlobalManufacturing Competitiveness Index ( see table below ),

we can see that in Europe ( in green ), Germany is the most competitive and Greece the least. But what is striking us is the deep difference even between Germany, France and Italy... On this survey, South Africa is more competitive than France ...

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​​​Global CEO Survey: 2013 Country manufacturing competitiveness index rankings



​​Current competitivenessCompetitiveness in fve years



RankCountryIndex scoreRankCountryIndex score 10 = High 1 = Low





China 10.00

Germany 7.98

United States of America 7.84

Canada 7.24

Japan 6.60

Poland 5.87

United Kingdom 5.81

Australia 5.75

​Czech Republic 5.71

Turkey 5.61

Sweden 5.50

Switzerland 5.28

Netherlands 5.27

South Africa 4.92

France 4.64

Belgium 4.50

Romania 4.09

Italy 3.75

Spain 3.66

Portugal 3.39

Ireland 3.23

Greece 1.00



Source: Deloitte Touche Tohmatsu Limited and U.S. Council on Competitiveness, 2013 Global Manufacturing Competitiveness Index

In Europe, business leaders see only the continent’s intellectual property protection policies contributing to a competitive advantage for them from the 19 policy selection choices. At the other end, only three policies were cited by European business leaders as contributing to a clear disadvantage; they include labor policies, immigration policies and policies resulting in government intervention and ownership in companies.



So overall, the chunk of the countries in Europe are not very competitive among the G7​ countries...



Europe competitiveness is still a wish, espescially in France ...​​

The French Economic Maginot Line : A Very Weak Strongpoint !

( From Wiki, ​Insee, News to- use, Sober Look, Mish, Bloomberg, Haver, BondVigilantes, TestorteronePit, Quartz,

​Pictet , Sober Look, Gulf News, The Atlantic )

Weak Growth



​​Since the start of 2011 French economic growth has been extremely disappointing, falling from an annual rate of nearly 2.1% to negative 0.3% in the fourth quarter of 2012. ( See graph below )





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Poor Competitveness

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But back to the ability of France to grow its way out of a fiscal hole. Competitiveness is something that continues to worry us about the economy. The French current account is sharply in deficit, looking more like Spain or Italy than the “core” of Germany or the Netherlands (but not looking as bad as the UK’s current account deficit of 5.4%, the most important reason we think that the pound is massively overvalued).

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In a typical economic model, a country with a current account deficit like this would devalue its currency to help its exporters. The single currency zone of the Eurozone doesn’t allow this to happen, so instead an internal devaluation has to occur instead. Since the creation of the single currency, the German economy has outperformed, with strength in exported goods leading that strength. This was no accident – post the collapse of the Iron Curtain, German companies had come to agreements with trade unions (a kind of neo-corporatism in which the government, companies and workers are social partners in a capitalist framework) to have wage restraint and thus keep German manufacturing from heading east to the cheaper labour supply. It meant that in the 12 years since the creation of the single currency, German labour costs rose by less than 25%. In Greece they rose by 65%, Spain 55% – and in France by 40%. Relative to Germany then, French labour costs had risen by 15% more, a significant deterioration of relative competitiveness within the core of Europe

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​It’s clear that the “internal devaluation” is occurring in Greece and Spain, with labour costs falling sharply (as unemployment rockets). I’m not arguing this is positive – in the medium term it will stimulate exports as factories relocate in lower cost regions, but in the nearer term the drag this will have on Spanish and Greek growth could be medicine that kills its patient. But if there is capital to invest in plant, equipment and people in Europe once, and if, uncertainty fades, would it go to France, or to lower cost, restructured Spain?



And aggressive, publically stated austerity doesn’t appear to be a policy with great results – look at the UK where we’ve done less than 10% of the spending cuts that the coalition have planned, yet the psychological impact on the economy has been severe, and since the credit crisis began the UK economy has underperformed not just the US (where they did some good old Keynesian fiscal stimulus) but also the Eurozone, which is widely regarded as an economic disaster area here despite it having outperformed us by about 2% of GDP over the period (and having a lower debt/GDP level too, if you took the region together as a whole).

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Of course the whole Eurozone has seen weakness over the period, but French growth has lagged that of the “core” over the period. German GDP growth was at or above 2% for all but the last two quarters, and now stands at just 0.1%. Purchasing Managers’ surveys for February show more divergence, with more falls in French manufacturing and services, whilst the German surveys strengthened.



​​ While many of its austerity measures are clearly necessary, such action (combined with poor private sector competitiveness) is translating into a significant divergence in growth between France and the rest of the Eurozone. So the French composite PMI (manufacturing + services) has deviated sharply to the downside. ( See graph below )



With this weakness in the corporate sector, it was not surprising to see Hollande announcing that France will miss its target on GDP growth this year.

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President Francois Hollande acknowledged on last week that France will miss its 0.8 per cent 2013 growth target, hours after his foreign minister said the growth rate could come in at less than half that level.



Laurent Fabius told RTL radio that French growth this year would be no better than around 0.2 to 0.3 per cent. It was the second time in a matter of days that Fabius, a prime minister in the 1980s and one of the most senior members of the government, let the truth slip about France’s economic outlook after revealing last week that the deficit goal would be missed. “Since on the European level things don’t seem to be going so well, we will be obliged to lower it,” Fabius said of the growth target.



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Fiscal Tightening

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​Hollande was elected on a platform of putting up taxes on the rich. He also pledged to cap France’s budget deficit. As such the Draft Budget Law (PLF) for 2013 did not surprise the French population – there will be a fiscal tightening made up a third from household taxes, a third from corporate tax rises and a third from spending cuts.



​​Goldman Sachs estimates that the tax take as a percentage of GDP will rise from 44.9% to 46.3%. But even this relatively aggressive tightening of fiscal policy (and the projections are based on GDP growth higher than many believe is possible, especially in light of that same fiscal tightening and a climate of austerity) doesn’t prevent debt/GDP from rising above 90% in 2013.



And France feels home alone ​​because France seems to be the only EMU nation who is undergoing a larger fiscal tightening in 2013 than it did in 2012. ( See graph below )



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​​ France May Need ’Additional Efforts’ on Deficit, EU Says

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France may need to take additional measures to tackle its budget deficit, European Union Economic and Monetary Affairs Commissioner Olli Rehn said.



“Important steps have been taken which include consolidation measures aimed at bringing the deficit to 3 percent of GDP, measures on competitiveness to lower in particular the fiscal burden on companies and the on-going negotiation to reform the labor code,” Rehn said in a written response to a question from the European Parliament. “In many cases, these reforms are still at a very early stage and additional efforts might still be needed.”



The French government “needs to undertake wide-ranging structural reforms to ensure a sustainable return to growth and to continue fiscal consolidation efforts to bring the excessive deficit procedure to an end,” Rehn said in the response, which is dated Jan. 16.



“The increasing unemployment also calls for specific attention,” Rehn said. “Finally, the deterioration of export competitiveness has resulted in serious external imbalances.”



More spending cuts loom



Fabius said that the missed target meant additional savings would be required at both the national and regional levels, without giving details.



On Monday, Finance Minister Pierre Moscovici would not comment on a media report the Socialist government may add some ¤5 billion (Dh24.5 billion) onto the ¤60 billion in spending cuts it is already targetting over five years.

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Facing European Union pressure to reach budget targets, the Socialist president is risking the wrath of his core supporters to shrink the pension system, which had a deficit of 14 billion euros ($19 billion) in 2011.

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While leaving the issue of fixing the retirement age to talks between representatives of employees and employers, Hollande may propose separating pension increases from inflation, government officials said. He’s venturing upon a pension overhaul -- which few of his predecessors have managed without drawing millions into the streets -- as his government says it’s unlikely to meet this year’s budget-deficit target.

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Concerns



Economic fragility

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​France’s economic foundations are cracking. Unemployment hit 10.5% and is incessantly rising. The private sector is becoming comatose. Car sales sank 13.9% in 2012, from a lousy 2011; sales by its native automakers plunged even more: PSA PeugeotCitroën down 16.6%, Renault Group down 19.8%. Now home sales are grinding to a halt. And the finger-pointing has already started.



​​For the rich, the climate has become hostile, the rhetoric poisonous. So they’re bailing out en masse, and not just the super-rich.

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Real Estate Too Expensive

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In the lofty realm of apartments in Paris that are valued at €2 million or higher—€2 million doesn’t buy all that much in Paris anymore—a game of chicken is apparently transpiring. The number of transactions crashed by 42% in 2012.

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Optimism is hissing out of the French real estate bubble. For 2013, Barnes sees a market that remains “hesitant” during the first quarter of 2013, “with a low level of transactions,” that would gradually recover, somehow, with a “slow correction in prices”—rather than a sudden correction, or a crash even. Other industry insiders see darker clouds on the horizon.



“Sellers still haven’t understood that they have to lower their asking prices drastically, even though prices in Paris have already fallen more than 10%,” said Philippe Chevalier, CEO of Emile Garcin, another high-end real estate outfit. He blamed foreign buyers, or rather the sudden scarcity thereof—foreign, because few French can still afford to buy a nice home in their capital. They’ve been effectively priced out of the market. But foreign buyers have gotten cold feet, he said, due to the “accumulation of tax pressures on real estate.”



And not just in Paris. In the “provinces”—outside the metro area of Paris—sales of existing homes during the third quarter plummeted 20% year over year, accelerating from the 16% decline of the second quarter (PDF, released January 10). And new homes sales in France plunged 25% in the third quarter, a dizzying acceleration from the second quarter’s 14% decline.



Yet, prices in France, at least in the third quarter last year, haven’t budged much to the downside as sellers are still clinging to the hope—proven illusory in every real-estate bust so far—that this too shall pass. And despite mortgage rates that averaged 3.31% in November over an average term of 208 months, home mortgage originations plunged 32.6% from prior year.









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House Prices to Rental Valuation​ - Comparison

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​The Economist stuck its finger into it—with a study of international real estate prices. It wasn’t aimed at France directly, unlike some of its other articles. But it hit France over the head.



The study used two measures and compared them to averages going back to 1975: the price-to-rent ratio and the price-to-disposable-income-per-capita ratio. It found that French real estate was massively overvalued: by 50% based on the price-to-rent ratio, behind Canada (78%), Hong Kong, (69%), and Singapore (57%); and by 35%, based on disposable income, just ahead of Canada (34%).



​​It made France the most overvalued real estate market in the world based on disposable income, and the fourth most overvalued one based on rents. Overvalued housing in a teetering economy: bon appétit. ( See graph below )

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Conclusion

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So for France, a mix of ​Weak Growth, Poor Competitiveness, Fiscal Tightening and Expensive Housing Market make the Perfect Real Toxic French Economic Cocktail. A kind of Perfect Storm looming... What we have to realize finally is that, the French Economic Maginot Line is a Very Weak Strongpoint



More budget cuts will only accelerate the downturn like what happened to Greece and Spain...​​

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The Maginot Line - Summary

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The Maginot Line ( French: Ligne Maginot, my traduction is Imaginary Line ) named after the French Minister of War André Maginot, was a line of concrete fortifications, tank obstacles, artillery casemates, machine gun posts, and other defenses, which France constructed along its borders with Germany and Italy, in light of its experience in World War I, and in the run-up to World War II. Generally the term describes only the defenses facing Germany, while the term Alpine Line is used for the Franco–Italian defenses.



The French established the fortification to provide time for their army to mobilize in the event of attack, allowing French forces to move into Belgium for a decisive confrontation with German forces. The success of static, defensive combat in World War I was a key influence on French thinking. Military experts extolled the Maginot Line as a work of genius, believing it would prevent any further invasions from the east (notably, from Germany).



While the fortification system did prevent a direct attack, it was strategically ineffective, as the Germans invaded through Belgium, flanking the Maginot Line. The German army ran through the Ardennes forest and the Low Countries, completely sweeping by the line, defeating the French army and conquering France in about six weeks.[1] As such, reference to the Maginot Line is used to recall a strategy or object that people hope will prove effective but instead fails miserably. It is also the best known symbol of the adage that "generals always fight the last war, especially if they have won it".[2]



The Maginot Line was impervious to most forms of attack, and had state-of-the-art living conditions for garrisoned troops, including air conditioning,[citation needed] comfortable eating areas and underground railways. However, it proved costly to keep, consumed a vast amount of money and subsequently led to other parts of the French Armed Forces being underfunded.



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The French Economy



As the Maginot Line, the French were feeling quite strong about their own destiny. In fact, after the financial crisis of 2008, it did just accelerate the obvious :​​ Weak Growth, Poor Competitiveness, Fiscal Tightening.

Expectations on Growth are Getting weaker by the minute



Expectations indexes from the Insee are pointing to a very weak French economy going forward as shown by the charts below... ​​



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Retail Consumption Extremely Weak

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In February, households expenditure on goods decreased by 0.2% in volume.



​​After a sharp decrease in January (-7.1%), households expenditure on durable goods increased in February (+0.9%). Car purchases, which fell in January (-11.5%) due to households expecting a strenghtening of penalties on the purchase of polluting cars from January 1st, slightly recovered in February (+2.4%). However, purchases in household durables decreased again in February (-0.9%, after -3.0%).

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And retail sales keep falling​ with now breaking in negative level at -0.1% year-over-year as shown by the chart below. With the inflation rate at 1%, we do have real retail sales at negateive 1.1%, brutal !