France Defends ‘Truly Solvent’ Economy After Labor Minister Michel Sapin Says Country ‘Totally Bankrupt’

In a radio interview on Sunday, Sapin replied to a question on the economy by saying: “There is a state, but it is a totally bankrupt state. That is why we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective.”

He later told the AFP news agency that he was speaking of the state of finances in the past and his comment did not apply to the government of current French President Francois Hollande. The minister said he was being “ironic” at the time.

French Finance Minister Pierre Moscovici immediately tried to play down Sapin’s comments, saying they were “inappropriate.”

“France is a truly solvent country, France is a truly credible country,” Moscovici added.

France’s total public debt topped 90 percent of the value of everything produced in the economy last year, well above the European Union’s target of 60 percent. Hollande has promised to reduce the country’s deficit to below 3 percent of output this year from 4.5 percent by cutting spending and hiking taxes.

In November, rating agency Moody’s downgraded France’s debt from Aaa to Aa1. The decision also came with threats of further downgrades if the government fails to implement reforms to fix France’s public finances.

France And Germany About To Diverge

Recent economic data indicates that France, Europe’s second-largest economy, is lagging further behind Germany and economists suspect that this gap between the euro zone’s two leading economies will widen as the year goes on.

“The relationship between France and Germany is likely to come under further strain, making compromises on important euro-zone policies difficult to reach,” Capital Economics senior economist Jennifer McKeown said in a note to clients.

Business sentiment data for January showed continued, albeit very gradual, improvement in the euro area, but also highlighted a striking divergence between the two biggest countries.

In Germany, the ZEW, the flash PMIs and the IFO exceeded expectations, with surging forward-looking components and resilient current conditions. Meanwhile, sentiment in France has deteriorated sharply. Flash composite PMIs have dropped nearly 2 points, back to levels not seen since August 2009. With the final release due at the beginning of February, French PMIs now look likely to be among the weakest in Europe, below Italy and Spain and only marginally above the Greek surveys.

Labor market developments are also depressing French consumer spending, with unemployment much higher than in Germany and still rising.

France’s economy is expected to have contracted in the last three months of 2012 and the first quarter of this year, and is set to post no growth in 2013, according to Bloomberg surveys.

Hollande has promised to reverse the trend this year, but the recent slow pace of labor market reforms suggests that any recovery will take longer to occur, McKeown said.