Market Overview

Profiting from the Zero Growth French Economy


The French economy unexpectedly stagnated during the 2nd quarter, according to France's National Institute of Statistics and Economic Studies, which reported that France's 2nd quarter economic growth rate was 0% and that consumer spending fell 0.9%.

The news is troubling because France is the second biggest economy in the eurozone, so what happens in France is much more important than what happens in smaller troubled eurozone countries like Greece, Portugal and even Spain.

Like those and other countries throughout the Western world France is struggling with painful efforts to reduce its deficit.

There are even rumors that France may be the next country to lose its enviable triple-A credit rating.

It should be noted that slow economic growth has been a major factor in a number of sovereign downgrades this year because when a country's economy grows more slowly than the government's spending, deficits expand.

French president Nicolas Sarkozy is under pressure to come up with a plan to cut the deficit but whether or not he will be able to find a solution and stick with it is still in question.

If Sarkozy is going to put forth a credible plan to reduce France's deficit, it will undoubtedly follow a similar blueprint combining tax increases with spending cuts that has been used by other eurozone members like Greece, Portugal, Spain and Italy.

One of the problems facing president Sarkozy is that France's unions are well known for being able to bring the country to a standstill when trying to get their way.

The unpopular French president also faces an election next year and his opponents are already casting blame on him for the growing deficit because of tax cuts implemented by Sarkozy.

Although Sarkozy is not doing well in the polls, his opponents need to be careful of how they address his efforts to lower France's deficit because in the aftermath of events in Greece, Ireland and Portugal they do not want to appear to be financially reckless.

The news that France's economy has become stagnant couldn't have come at a worse time, a day after France, Italy, Spain and Belgium announced that they were putting restrictions on short sales in an effort to reduce recent market volatility and a week after the United States government saw its credit rating downgraded by Standard & Poor's.

If these are the first signs that France will be the latest country to face possible downgrades to its credit rating, the euro may come under further pressure.

If that happens, more money might start moving into investments like the CurrencyShares Japanese Yen Trust (NYSE: FXY) and the CurrencyShares Swiss Franc Trust (NYSE: FXF).

Although Japan and Switzerland have made moves to keep the values of their currencies from rising any higher, the relative financial weakness of the United States and many eurozone members makes Japanese yen and Swiss francs more appealing than dollars and euros.

With France being the latest eurozone country to report a sputtering economy and weakening consumer spending, investors should take a look at the ProShares UltraShort MSCI Europe (NYSE: EPV).

With an election coming next year, France's president Sarkozy may be limited in how much spending he can cut.

Even if the French president announces spending cuts, the markets may question his ability to implement them if France's unions show signs of striking.

If France is somehow able to cut government spending and kick start the economy, French stocks like Sanofi-Aventis (NYSE: SNY), EDAP TMS (Nasdaq: EDAP) and Flamel Technologies (Nasdaq: FLML), should perform well.

Investors who prefer to diversify their French holdings between a wider array of stocks could choose the iShares MSCI France Index (NYSE: EWQ) ETF.


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