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Mellon Capital Report Highlights French Challenge of Stimulating Growth and Meeting Austerity Targets

Report from BNY Mellon Investment Manager Highlights Need for Government to Remain Focused on Economic Recovery

France's new government is likely to face significant challenges in delivering the anti-austerity policies under which it was elected, while also adhering to euro area budgetary targets and returning the economy to more sustainable and robust growth, according to a white paper from Mellon Capital Management Corporation, the San Francisco-based global multi-asset manager for BNY Mellon.

The white paper, France: Is the Core At Risk?, highlights the difficulties the country faces by noting that the net external investment position is negative, economic forecasts are expecting weak growth, and the country has had budget deficits for decades.

The report also cites France's large public sector and a labor force that has a high reliance on government-funded employment.

"At the moment, French debt is enjoying a safe-haven status within the Eurozone," said Vassilis Dagioglu, managing director, head of asset allocation portfolio management of Mellon Capital. "However, the long-term ability of France to manage its debt boils down to whether the government can rein-in its budget deficits while generating enough growth in its gross domestic product. In our view, this deficit reduction is necessary to maintain or even reduce the sovereign debt load."

The Mellon Capital report cites France's need to achieve net savings of between six to 10 billion euros this year and 33 billion euros next year to meet deficit targets in 2012 and 2013. France's debt load is more front-loaded than Germany's during 2012 to 2014, even though France's public debt as a percent of gross domestic product is not much higher than Germany's, the report said.

"It will be important for the government to stay focused on returning the economy to a more prosperous growth dynamic and ensuring that France doesn't fall into laggard growth traps, as happened with Spain and Italy," said Sam Valtenbergs, senior quantitative research analyst, and the report's author. "There has not been a single year since the formation of the euro in which France has received positive net foreign direct investment (FDI) flows."

Since 1999, France has seen almost $700 billion worth of foreign investment capital leave the country, according to the report.