October 1, 2015    4 minute read

France & The Middle East: A Weakened Bond

   October 1, 2015    4 minute read

France & The Middle East: A Weakened Bond

The Middle East migrant crisis has caused Europe to see a record breaking influx of arrivals. This year alone, over half a million migrants have arrived in Europe from the conflict-torn regions in North Africa and the Middle East. The situation has proved to be a huge test for Europe, with Germany’s federal government pledging to double its state funding, Hungary constructing a highly controversial 110 mile razor-wire fence along its Serbian border to cope with the inflow and the UK agreeing to accept 20,000 immigrants over the next five years.

However, aside from highlighting the seemingly deep-rooted problems within the EU, the current state of affairs also has something to teach us about the French economy. On the September 18th 2015, Moody’s Investors Service lowered France’s government bond rating to Aa2 from Aa1, due to the weaker than expected outlook for the nation’s growth which has fallen from “stable” to “negative”. In their statement regarding the downgrade, Moody’s said its decision was prompted by “the continuing weakness in France’s medium-term growth outlook,” which it expects to “extend through the remainder of this decade”. France’s debt to GDP ratio currently stands at 96.4% according to the European Commission’s economic forecast made earlier this year, placing it amongst the most highly indebted countries in Europe. The low growth which levelled off in the second quarter of 2015 is combined with institutional and political issues embedded within French society, causing reduction in consumer and business confidence in the Eurozone’s second largest economy.

The undesirable state of the French economy has continued the increase in sovereign bond yields, as demonstrated by French 10 year bond yield rising from 0.352% to 1.045% over the past 5 months, reflecting investors’ lack of confidence in the French recovery. As French bond maturities lengthen, we see why investors are somewhat lacking in confidence, as the longer duration also means more exposure to the risk of adverse effects. In addition, the OECD reduced its growth forecast for France from 1.7% to 1.4% last week, a more pessimistic prediction than the government’s 1.5%. Despite the aforementioned facts, the socialist government has, so far, remained confident in the pace of the recovery, boosted by a lower euro, cheaper energy prices and a plan to grant €41 billion in tax breaks for companies over three years. Michel Sapin, France’s Minister of Finance, said the 1.5% growth forecast for 2016 was “prudent” and that businesses were starting to hire and boost investments.

The general consensus of experts in economics and migration is that the high level of relocation by Middle Eastern refugees has potential to greatly benefit the French economy, both politically and economically in terms of increasing its potential to grow through a stronger workforce, especially over the long run given the likelihood of migrants making a homeward journey in the near future is low. Holger Schmieding, Economist at the German Investment Bank Berenberg, estimated that the arrival of refugees could boost economic output in the Eurozone by 0.2% in the second half of 2015 progressing into 2016.

Nonetheless, migrants coming in to Europe from the war torn Middle East, are heading increasingly towards Germany, Sweden and the UK – demonstrating the loss France has made in terms of its attractiveness to those looking to flee and seek asylum outside their home countries. This indicator tells us a lot about the climate in France, when combined with recent bond market trends, which are typically considered a significant reflector of the direction of a country’s economy. Jean-Christophe Dumont, specialist in Immigration at the OECD has said that:

“Refugees, like other migrants, do not aim to be dependent on welfare…they want to rebuild, to have a better life for their children, to work.”

Bearing this in mind, we can draw conclusions from the decisions that have been made by conflict-zone fleers, who despite their desperate situations are looking to broaden their horizons as much as possible. Perhaps the fact that France is not attracting as many migrants as it once did should be taken as a sign by the government that in order to attain desirable conditions, reforms need to be made by investing borrowed money more wisely, so as to relieve the economy of the high debt burden it is currently facing.

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