France in the line of fire as alarm bells ring over its inability to adapt

FRANCE came under heavy fire on global markets yesterday reflecting fears that the eurozone’s second biggest economy is being sucked into the debt crisis after a warning that Paris’s inability to adapt should be “ringing alarm bells”.

Nervous markets also showed concern about whether Italy’s Mario Monti and new Greek leader Lucas Papademos, unelected European technocrats without a domestic political base, can impose tough austerity measures and economic reform.

European Central Bank president Mario Draghi has predicted the 17-nation eurozone will be in a mild recession by the end of the year, a view underlined by data showing the economy barely grew in the third quarter and faces a sharp downturn.

“The risks of a technical recession have increased and we expect the economy in Germany to shrink at least in one quarter, most likely in the first quarter of next year,” said economist Michael Schroeder of German economic research institute ZEW.

On the markets, Italy’s 10-year bond yield rocketed back above 7%, pushing its borrowing costs to a level widely seen as unsustainable in the long term, which helped trigger the fall of Silvio Berlusconi’s government last week.

Spain’s Treasury paid yields not seen since 1997 to sell 12- and 18-month treasury bills.

French 10-year bond yields have risen around 50 basis points in the last week, pushing the spread over safe haven German bonds to a euro era high of 173 basis points.

French banks are among the biggest holders of Italy’s €1.8 trillion public debt pile.

The urgency of resolving the debt crisis was underscored by a think-tank report saying triple-A rated France should also be “ringing eurozone alarm bells” as it could not make rapid adjustments to its economy.

In New York, US stock index futures fell sharply yesterday morning after the rise in European bond yields, the drop caused by fears in the US that Europe’s debt crisis was mushrooming into a wider systemic problem.

President Barack Obama’s top economic adviser said the European debt crisis was the leading risk to the US recovery.

“Clearly, Europe is a tremendous concern,” Alan Krueger, chairman of the White House Council of Economic Advisers, said.

“It is important they act quickly, because it is a threat not only to Europe and the US, but the world as a whole.”

With the survival of the eurozone in its current form now at risk, EU governments have until a summit on December 9 to come up with a bolder and more convincing strategy, involving some form of massive, visible financial backing.

The debt crisis is likely to make matters worse in the next months with nations such as Italy, Greece, Ireland, Portugal and Spain forced to adopt politically unpopular cuts to stop the bond market driving them towards default.

Economists say there is no visible growth strategy in place to counter those austerity measures.

After last week’s disastrous week for the eurozone’s third biggest economy, Italy’s Monti appeared to win a key breakthrough yesterday when Angelino Alfano, secretary of Berlusconi’s People of Freedom (PDL) party, emerged from the talks saying moves to form a government would succeed.

With the eurozone under intense scrutiny, Germany and France posted solid growth in the third quarter, statistics released yesterday showed, but eurozone nations on the front line of the debt crisis fared much worse and analysts expect bleaker times ahead in the core economies.