France Posts Record High Trade Deficit, While German Industrial Output Also Drops

France’s trade deficit reached an all-time high last year – amounting to about 69.6-billion euros -- raising serious questions about French competitiveness and its ability to cope with rising energy import costs and climbing labor expenses.

Roger Bootle, a senior economist at Capital Economics in London, said of France’s fragile economy: “Signs that France is following the periphery into recession… are clearly very worrying. If the euro-zone’s second largest economy is turning down, there is little hope that the region as a whole can avoid a recession. What’s more, France’s weakness will make it even less able to provide any further support for the indebted periphery.”

Meanwhile, France’s powerful neighbor Germany suffered its biggest drop in output in almost three years.

“As the industrial downturn continues and households remain in cautious mode amid a deepening crisis elsewhere in the euro-zone, we see the German economy stagnating this year,” said Jennifer McKeown, senior European economist at Capital Economics.

“What’s more, worse might well be to come in 2013.”

The trade data from Paris strongly suggests that the euro zone financial crisis is putting a severe crimp in France’s (and perhaps Europe’s) share of global trade.

Michel Martinez, an economist at Societe Generale SA in Paris, told Bloomberg: “France’s trade deficit has been deteriorating for a decade, and it’s about competitiveness, it’s obvious.”

Indeed, France has logged trade deficits every year since 2002, while the French share of international trade has been shrinking.

According to the French treasury, France’s share of global trade fell from 7.8 percent in 2003 to 6.2 percent in the final quarter of 2011. France is gradually losing its vitality and presence in global export markets.

French imports climbed 11.7 percent last year (as measured in euros), while the value of exports rose by 8.6 percent (down from a 14 percent increase in 2010).

France's exports to its European Union (EU) neighbors grew by only 7.5 percent, versus 11.5 percent growth in 2010. Exports elsewhere in the world climbed by 8.8 percent, dramatically less than the 18.6 percent growth recorded in 2010

Overall, the French trade deficit was 35 percent higher than that recorded in 2010, although it fell at the lower end of the Paris government’s own forecasts.

The problem is that of competitiveness and reindustrialization of our country, France’s foreign trade minister Pierre Lellouche told reporters in Paris.

Today's figures are clearly not good but I am happy at the same time to see that our foreign trade position is becoming an issue as the presidential election approaches.

France has a particularly high deficit with Asian superpower China -- amounting to some 27-billion euros.

“This [deficit with China] is not sustainable in the long term,” Lellouche said.

“I can tell you that when I meet my Chinese counterparts, the discussion [will be] animated; that’s because we have problems there.”

Dominique Barbet, an economist at BNP Paribas, told the Wall Street Journal: “Looking at the geographical breakdown, most of the deficit is in trade with China, Germany and Belgium. This reflects the weakness of the French manufacturing sector.

Lellouche further warned that it will take some time for France to regain its strength as an exporter, due to ingrained structural issues.

“These are subjects that haven’t been looked at in France since [the days of former presidents Charles de Gaulle and Georges Pompidou].”

The high trade deficit will make President Nicholas Sarkozy’s already tough re-election bid this even more difficult.

Sarkozy is running poorly in most election polls well beyond the presumed Socialist candidate Francois Hollande, with France’s worsening economy becoming the dominant theme of the campaign.

Lellouche added: Foreign trade and the national debt are benchmarks of a country's independence ... It's time to shake off this idea that industry is a dirty thing and that the domestic market is the only route to economic growth.”

Germany also had some bad economicnnews.

The German economic ministry reported that output dropped by 2.9 percent in December, following a flat November, the largest such decline since January 2009, when production plunged 7.1 percent, For the fourth quarter as a whole, German output slipped by 1.9 percent.

Reuters reported that German GDP is believed to have shrunk by 0.25 percent in the fourth quarter of last year.

However, Germany may have some brighter economic on the horizon. Germany is expected to show a 2011 trade surplus of some 156-billion euros when it reports its economic data on Wednesday.