Threadneedle warns of growing France threat

Threadneedle Investments has warned of the danger presented to the European economy by a lack of economic growth measures in France.

Threadneedle warns of growing France threat

Fixed income manager Martin Harvey said the latest developments in the Eurozone’s second economy highlight the political strains associated with a ‘stagnant economy’ and the struggle between politicians to agree on the best trade-off between growth policies and budget control.

Harvey says, ‘chronic lack of growth potential’ in France is a worry for investors. Any reforms which could kick start growth would require levels of popular support not enjoyed by the present Hollande led regime, he explains.

“More broadly, the push-back against aggressive fiscal consolidation has the potential to cause further disagreements at the European level, and the fact that ECB’s Draghi is supportive of greater fiscal flexibility may add fuel to the fire,” Harvey said.

Harvey noted that the French government bond market has maintained a ‘sense of calm’ despite the poor growth outlook and political stresses, as investors seem happy to accept long-term structural risks in exchange for higher yield relative to German Bunds. 

The growing danger that the lack of growth brings however is not in the bond market, at least in the first instance, but in the politics of the country. Harvey said that should the lack of a centrist solution persist, the French electorate will continue to gravitate toward extremes left and right wing politics, creating a threat to the European establishment’s entire project. 

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