France rebels against austerity as Europe's recovery collapses

By Ambrose Evans-Pritchard

France’s finance minister sends tremors through European capitals with a defiant warning that his country would no longer try to meet deficit targets.

German GDP contracted 0.2pc, is France once again stuck at zero and Italy is already in a triple-dip recession

Eurozone strategy is in tatters after economic recovery ground to a halt across the region and France demanded a radical shift in policy, warning that austerity overkill is driving Europe into a depression.

Growth slumped to zero in the second quarter, with Germany contracting by 0.2pc and France once again stuck at zero. Italy is already in a triple-dip recession.

Yields on 10-year German Bunds fell below 1pc for the first time in history, beneath levels seen during the most extreme episodes of deflation in the 19th century. French yields also touch record lows. Much of the eurozone is replicating the pattern seen in Japan as it slid into a deflation trap in the late 1990s.

It is unclear whether tumbling yields are primarily a warning signal of stagnation ahead or a bet by investors that the European Central Bank will soon be forced to launch quantitative easing, buying government bonds across the board.

Michel Sapin, France’s finance minister, sent tremors through European capitals with a defiant warning that his country would no longer try to meet its deficit targets and would not inflict further damage on its economy by tightening into the downturn. “I refuse to raise taxes to close any budget gaps,” he said.

“What is absolutely necessary is to adjust the pace of deficit reduction to the exceptional situation we are in today. Growth is too weak in Europe and inflation is too low. We must therefore stop reinforcing the causes of this depression,” he told RTL television.

“We must face the figures in front of us with realism. The truth is that, contrary to the forecasts of the International Monetary Fund and the [European] Commission, growth has broken down, both in France and in Europe.”

He halved his French growth forecast to 0.5pc this year and to little more than 1pc next year, too weak to stop unemployment hitting fresh highs. The IMF has already warned that there will be no job growth until 2016.

Germany has so far refused to yield any ground on austerity policies but is increasingly vulnerable. Revised data show that the economy has been far weaker than thought over the past two years, falling into a significant double-dip recession last year. Professor Paul De Grauwe, from the London School of Economics, said: “They are victims of their own folly. Germany needs massive investment in its energy sector and it should be doing it now while it can borrow for almost nothing.”

...read more