Italy and France Are Risks to Euro Zone, Report Says

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.

“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.

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.

In Spain, very high levels of debt, both domestically and externally, continue to pose serious risks for growth and financial stability, the report said.

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.

The report on so-called macroeconomic imbalances said Italy and France, among others, others were suffering a decreased ability to withstand economic shocks.

In Italy, real gross domestic product has declined by 7 percent since the onset of financial and debt crises in mid-2008.

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.

“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.

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.

“Should these trends continue, they would increasingly push down France’s medium-term growth prospects,” the report said.

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 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,” the report noted.

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.

Overall, the French debt “represents a vulnerability not only for the country itself but for the euro area as a whole,” the report warned.

Article source: http://www.nytimes.com/2013/04/11/business/global/italy-and-france-are-risks-to-euro-zone-report-says.html?partner=rss&emc=rss