– France Must Pursue Consolidation, Restore Competitiveness

PARIS (MNI) – Without a clear long-term vision of the future of the
Eurozone and structures to impose budget discipline and manage crises,
the European Central Bank’s support will be of little impact, Governing
Council member Christian Noyer said Tuesday.

This is one reason why the ECB has not been actively buying up
sovereign bonds, since “only fundamental measures by governments” can
restore investor confidence over time, the governor of the Bank of
France said in presenting the central bank’s annual report.

There are “good reasons” why the ECB’s mandate prohibits direct
financing of governments through monetary creation, Noyer said.

But the ECB can play a key role in creating a unified system of
bank supervision in short term until a true banking union is
established, he said.

While the negative interest rates on recent German and French
short-term bill issuance can be viewed as a sign of confidence, they
also illustrate the dysfunctioning of money markets, Noyer said: “We are
not out of the woods yet.”

Turning to France, Noyer underscored the need for further fiscal
consolidation to preserve low interest rates and the sustainability of
France’s social model, including the public health care and pension
systems.

Consolidation must be flanked by economic growth and the
restoration of producers’ competitiveness, he stressed, citing high
labor costs as one cause of France’s loss of market shares over the past
decade.

“Efforts to increase purchasing power should be based not on a
generalized rise in wages that does not reflect productivity and
therefore fuels unemployment, but on shifting the focus of professional
training towards the least-skilled and an increase in full-time jobs,”
Noyer said in the report.

At the same time, domestic constraints on supply must be overcome
through structural reforms of goods and services markets. This applies
to the housing market as well, where limits on building land and
construction permits have contributed to a price spiral that is
“dangerous for financial stability,” he said.

A harmonization of various kinds of work contracts would help
overcome the segmentation of the labor market, which penalizes young
jobseekers, he said.

Regarding the government’s intention to separate the deposit and
lending operations of banks from their speculative activity, Noyer
conceded that pure speculation should be regulated and perhaps banned –
notably for naked CDS trading – but that “the vast majority of French
banks’ financing and investment activities do not fall into this
category and are in fact very useful for the real economy.”

“France has allowed serious weakness to develop over the past few
decades, which accounts for the slow deterioration in its economic
position in Europe and the world,” the governor said. The chronic
deficit in the social security system “will spell its demise if it is
not addressed without delay.”

–Paris newsroom +331 4271 5540; email: ssandelius@marketnews.com

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