This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.nytimes.com/2013/04/11/business/global/italy-and-france-are-risks-to-euro-zone-report-says.html

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
Italy and France Pose Grave Risks to Euro Zone, Report Says Italy and France Pose Grave Risks to Euro Zone, Report Says
(about 9 hours later)
BRUSSELS — Declining competitiveness in France and Italy due to high debt and labor costs is threatening to cause grave economic problems for the rest of the euro area, the European Commission warned on Wednesday. BRUSSELS — The struggling economies of France and Italy are out of step with better-performing countries like Germany, raising the prospect of more trouble for the euro zone, the European Union’s top economics official warned Wednesday.
In Spain and Slovenia, structural economic imbalances are “excessive,” according to a report covering 13 European Union countries prepared by the commission’s directorate for economic and monetary affairs. France and Italy are among the nations in the beleaguered bloc that need to accelerate the policy changes needed to improve their competitiveness and help the euro zone exit a lingering economic crisis, said Olli Rehn, the European commissioner for economic and monetary affairs.
“Decisive policy action by member states and at E.U. level is helping to rebalance the European economy,” Olli Rehn, the commissioner for economic and monetary affairs, said in a statement before a press conference Wednesday. The uneven performance of economies using the euro is one of the main reasons for the severity of a debt crisis in which some of the worst affected countries were able to borrow more than they could repay.
But “it will take some time yet to complete the unwinding of the imbalances that were able to grow unchecked in the decade up to the crisis, and which continue to take a toll on our economies,” Mr. Rehn said. While the Union has made some strides in rebalancing its economies, “it will take some time yet to complete the unwinding of the imbalances that were able to grow unchecked in the decade up to the crisis, and which continue to take a toll on our economies,” Mr. Rehn said at a news conference.
In Spain, very high levels of debt, both domestically and externally, continue to pose serious risks for growth and financial stability, the report said. A failure to address the problems in France could be particularly serious for the well-being of the common currency, Mr. Rehn said during a presentation of an annual report comparing the health and competitiveness of a number of Europe’s national economies.
In Slovenia there are substantial risks for financial sector stability stemming from high corporate indebtedness that is linked to and has an effect on public finances, according to the report. “France is, in terms of its size and geo-economic position, a very significant member of the euro zone and its health has a very direct impact on the overall health of the euro zone,” Mr. Rehn said.
The report on so-called macroeconomic imbalances said Italy and France, among others, others were suffering a decreased ability to withstand economic shocks. Mr. Rehn’s approach has previously come in for tough criticism from some U.S. officials and the International Monetary Fund, which have warned that his calls for more austerity are self-defeating in cases where it restrains economic growth, leading to wider deficits and making it harder for governments in already weakened economies to pay down debt.
In Italy, real gross domestic product has declined by 7 percent since the onset of financial and debt crises in mid-2008. Gross domestic product in the 17-nation euro area is expected to shrink 0.3 percent this year, while the 27-nation Union will grow just 0.1 percent, according to forecasts made by the commission in February.
Italy’s unit labor costs are increasing compared to its peers, which translates into a loss of productivity, while its specialized companies are increasingly unable to compete with those in countries like China, and the banking sector remains burdened by non-performing loans, the report said. But Mr. Rehn also echoed calls made earlier this week by the U.S. Treasury secretary, Jacob J. Lew, for Germany, the biggest economy in the euro zone and one of its most robust, to do more to spur spending and help revive growth.
“The potential economic and financial spillovers to the rest of the euro area remain sizeable, should financial market turmoil related to the Italian sovereign debt intensify again,” the report said. “I still believe, and the commission still believes, that there is much more Germany can do in order to boost its domestic demand,” Mr. Rehn said.
France successfully avoided a recession in 2010-2011, but its trade balance had been decreasing since 1997 and its external debt rose sharply in 2011. Germany, he said, should do more to open its service sector to competition, to increase the number of women in the labor market and to lift wages to match greater productivity. Such steps could lead to greater exports from other euro zone economies.
“Should these trends continue, they would increasingly push down France’s medium-term growth prospects,” the report said. Mr. Rehn characterized Germany’s current-account surplus as “rather high,” but also said it would decline in coming years. He also noted that Germany’s export strength had been largely owing to strong performance outside of the Union, and in particular in Asia.
In France, as in Italy, unit labor costs have increased, putting pressure on the profitability of companies and hurting innovation, according to the report. The German economy is healthy enough not to have been included in the report, which covered 13 E.U. member states described as having macroeconomic imbalances.
Those countries, including Britain, the Netherlands and Hungary, must specify how they plan to remedy their imbalances in annual economic plans that they must submit to the commission by the end of the month.
The commission has recently been given greater oversight of the Union’s national economies.
Mr. Rehn’s warnings were sternest in the cases of Spain and Slovenia, which he said were suffering from “excessive” imbalances.
In Spain, very high levels of debt, both domestically and externally, continue to pose serious risks to growth and financial stability, Mr. Rehn said, and despite significant overhauls, the country still faces “formidable challenges.”
In Slovenia, there are substantial risks to the stability of the financial sector from high corporate indebtedness that is linked to, and has an effect on, public finances, according to the report.
“Slovenia needs now to proceed swiftly and decisively” with reforms, Mr. Rehn said.
His report did not cover those countries that are already operating under international bailout programs — Cyprus, Greece, Ireland and Portugal. Their economies are monitored separately.
Unit labor costs in Italy are increasing compared with those of its peers, translating into a loss of productivity. Its specialized companies are increasingly unable to compete with those in countries like China, the report said, while the Italian banking sector remains burdened by loans in or near default.
“The potential economic and financial spillovers to the rest of the euro area remain sizable, should financial market turmoil related to the Italian sovereign debt intensify again,” the report said.
France successfully avoided a recession in 2010 to 2011, but its trade balance has been decreasing since 1997 and its external debt rose sharply in 2011, the report said. “Should these trends continue, they would increasingly push down France’s medium-term growth prospects,” it added.
As in Italy, unit labor costs in France have increased, putting pressure on the profitability of companies and hurting innovation.
“The reduced number of exporting firms, their relatively small size, as well as factors relating to the business environment are also impediments for export performance,” the report said.“The reduced number of exporting firms, their relatively small size, as well as factors relating to the business environment are also impediments for export performance,” the report said.
The commission heaped blame for France’s weak prospects on the structure of the labor market, where costs continue to rise and it is too difficult to reallocate workers to more productive areas of the economy. “The profit margin of French companies is the lowest in the euro area,” it added.
“The profit margin of French companies is the lowest in the euro area,” the report noted. The commission attributed France’s weak prospects to the structure of its labor market, where it is too difficult to reallocate workers to more productive areas of the economy.
The cost of servicing France’s “high and increasing public debt” is depriving the economy of public spending and will require higher taxes, according to the report. Mr. Rehn was expected to join the finance ministers from the E.U. member states on Friday for meetings in Dublin.
Overall, the French debt “represents a vulnerability not only for the country itself but for the euro area as a whole,” the report warned. On Friday morning, ministers from the euro area could give their approval for plans to lend Cyprus €10 billion, or $13 billion, for a bailout. But final legal approval will require the approval of governments in some donor countries, including Germany.
Euro zone ministers also are likely to reach a preliminary agreement on how to use their shared bailout fund, the European Stability Mechanism, to directly recapitalize troubled banks, as demanded by Ireland and a number of other countries.
Another main area of discussion during the meetings in Ireland will be whether to extend the maturities on bailout loans to Ireland and Portugal.