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France: What’s worrying the markets

Eric Feferberg | AFP | Getty Images

France's plans to reform its economy and cut its debt face "significant" risks, and its government is overestimating its growth prospects, one of the world's most respected ratings agencies has warned.

Concerns that its government may not be able to ramp up the pace of growth in the euro zone's second largest economy are growing.


France's ambitious program of economic reforms, including cuts to the country's health care and social security budgets, is at risk because of its "unprecedented scale, the fact that many measures remain undefined, the challenging political environment and the economy's weak growth," according to Moody's. The agency currently rates France's government debt Aa1, below neighboring Germany but the same level as the U.K., and predicts France's economy will grow by 0.6 percent in 2014 and 1.3 percent in 2015 – down from previous estimates of 1 percent growth in 2014 and 1.5 percent in 2015.

Francois Hollande, the country's socialist Prime Minister, called on France's euro zone partners to do more to help beat threatened deflation in the country on Monday.


"Weak inflation too has negative fiscal consequences onrevenues as well as on debt," Hollande said in an interview with French newspaper Le Monde.

"A lot will depend on the level of the euro, which hasweakened over the past few days but not enough. The ECB must take all necessarymeasures to inject liquidity in the economy."

Since Hollande came to power, he has announced sweeping measures to try and kickstart France's stagnant growth. However, 60 percent of the cuts planned for 2015-17,which are supposed to save 50 billion euros ($67 billion) have yet to be outlined properly, according to Moody's.

While the country's service sector returned to growth in July, this followed price cutting, according to Markit services PMI data released on Tuesday. This suggests that these businesses will not have profited much from the upturn.

Still, Moody's is likely to keep France's rating at Aa1 in September, owing to the uncertainty around forecasts, according to analysts at Rabobank.

- By CNBC's Catherine Boyle.

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