Europe News

France Faces 'Devastating Scandal' as Economy Stalls

Sean Gallup | Getty Images News | Getty Images

France's economy is at near-stall speed, trade and budget deficits widened last month and the country is embroiled in increasing political uncertainty.

The Bank of France forecast on Tuesday that the French economy posted growth of 0.1 percent in the first quarter of 2013, in line with its estimates, meaning that the euro zone's second largest economy will have narrowly averted recession after its economy contracted by 0.3 percent in the last quarter of 2012.

But such low growth could lead France's government to miss its budget deficit targets, which are based on growth of 0.8 percent this year.

The news came on top of widening trade and budget deficits in February and a decline in business confidence in the services sector, according to a monthly survey.

"The economic outlook continues to darken as we had expected," Tobias Blattner, an economist from Daiwa Capital Markets said in response to the data.

"This morning French exports were reported to have contracted by another 2.4 percent on the month in February, the same pace as in January. And with imports having fallen by "just" 1.7 percent month on month, France's trade deficit widened [to] the highest level since last June," he said in a note on Tuesday.

"This leaves France the only euro area country where the trade deficit consistently continued to widen over the past three months," Blattner added.

(Read More: Why the French Should Worry About France, Not Italy)

Against the backdrop of economic stagnation, U.S. Secretary of the Treasury Jack Lew is concluding a two-day visit to Europe on Tuesday that was . In France, however, the visit has been overshadowed by the country's increasing political disarray.

"France's economy is in a dreadful state," Nick Spiro, head of Spiro Sovereign Strategy, told CNBC on Tuesday. "It's been drifting away from Germany in terms of economic performance and competitiveness for some time now," he added.

Spiro said that investor appetite for French government bonds and the country's low borrowing costs belied the economic fundamentals. France's ten-year government bond was stable at 1.78 percent on Tuesday morning, having declined from 2.13 percent a month ago.

There was confusion on Monday after reports from the U.S.Treasury and French finance ministry suggested that a meeting between Lew and Moscovici had been cancelled. Speculation abounded that an imminent cabinet reshuffle in France over a tax avoidance scandal could have led to the cancellation. On Tuesday, however, it was confirmed that the two will in fact meet in Paris as initially planned.

Meanwhile, the scandal over France's former budget minister Jerome Cahuzac's secret Swiss bank account has grown in recent days. France's Foreign Minister Laurent Fabius has denied allegations in a French newspaper report that, like Cahuzac, he may have had a Swiss bank account.

Politicians, including the country's finance minister Pierre Moscovici, have come under scrutiny over "who knew what" about the foreign bank holdings and socialist president Francois Hollande, whose popularity is already at an all-time low, is under pressure to act.

(Read More: Tide Turning Against France, Say Economists)

"This has been a devastating scandal and has damaged the government's ability to pursue reform," Spiro said. "Hollande needed this scandal like he needed a hole in the head, it sends all the wrong signals."

Hollande has given his cabinet ministers until April 15 to publish their assets. The latest public polls show that the majority of French people are in favor of a cabinet reshuffle.