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THURSDAY TICKER: JULY 24th 2014 - New opportunities for European businesses, affordable energy bills for consumers, increased energy security through a significant reduction of natural gas imports and a positive impact on the environment: these are some of the expected benefits of the energy efficiency target for 2030 put forward today by the European Commission in a Communication. The proposed target of 30 % builds on the achievements already reached: new buildings use half the energy they did in the 1980s and industry is about 19% less energy intensive than in 2001. The proposed target goes beyond the 25% energy savings target which would be required to achieve a 40% reduction of CO2 emissions by 2030. At the same time the framework on energy efficiency put forward today aims to strike the right balance between benefits and costs - The California Pension Fund (CalPERS) has told the American press that it might cutting back on its investments into the hedge fund arena by as much as 40%. A CalPERS spokesman told papers that the investment staff will make a formal recommendation to the board in the fall. CalPERS reported a preliminary 18.4% return on investments for the 12 months that ended June 30th this year. CalPERS’ assets at the end of the fiscal year stood at more than $300bn - The number of funds notifying the Jersey Financial Services Commission (JFSC) of their intention to privately place into Europe under AIFMD rules broke through the 150 mark ahead of the end of the AIFMD transitional phase this week. The JFSC figures show that, as at 22 July, a total of 164 funds had opted to make use of Jersey’s private placement route into Europe, and that the UK was the top intended market for managers, followed by Sweden, Belgium, and the Netherlands - Vodafone Group’s debt rating was cut one level at Moody’s Investors Service after the carrier made multibillion-dollar acquisitions to expand in Spain and Germany. The second-largest wireless company’s senior unsecured debt was cut to Baa1, the third-lowest investment grade, from A3, says Moody. The outlook is stable. Newbury, England-based Vodafone reported net debt of £13.7bn ($23.3bn) for the quarter ended March 31st. It is the first time Moody’s has given Vodafone a rating lower than A3 since 2007. Standard & Poor’s and Fitch Ratings rank Vodafone’s debt at A-, the fourth-lowest investment grade. Vodafone’s acquisition of cable operators in Europe and falling revenue in some of its biggest markets contributed to the cut, Moody’s said - In a separate report issued this week, Moody's says the stable outlook on the European Bank for Reconstruction and Development's Aaa rating reflects the bank's conservative capital and liquidity practices, which should support its solid financial performances despite the challenging operating environment. The rating agency's report is an update to the markets and does not constitute a rating action. Moody's also notes that the bank benefits from very high liquidity, owing to its prudent treasury management policies, favourable debt structure and strong market access.

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The European Review

By Patrick Artus, chief economist at Natixis

The adjustment in France has not even begun

Wednesday, 30 May 2012 Written by 
The adjustment in France has not even begun The French have the impression that their economy has worsened significantly and that austerity policies are weakening employment and living standards yet this inevitable adjustment is still to come Indeed, when examining the situation of public finances, competitiveness, foreign trade, the sophistication of products and businesses, it is clear that the process of adjustment and improvement has hardly begun in France, whereas it has progressed a lot on some criteria in Spain, Italy and Portugal, and of course long ago in Germany. http://www.ftseglobalmarkets.com/

The French have the impression that their economy has worsened significantly and that austerity policies are weakening employment and living standards yet this inevitable adjustment is still to come Indeed, when examining the situation of public finances, competitiveness, foreign trade, the sophistication of products and businesses, it is clear that the process of adjustment and improvement has hardly begun in France, whereas it has progressed a lot on some criteria in Spain, Italy and Portugal, and of course long ago in Germany.

The impression in France of a significant deterioration of the economy and living standards

The French are extremely pessimistic about the economy and living standards, as showed by a recent international optimism poll conducted by BVA – Gallup international. Yet, the French unemployment rate is lower than Spain and Portugal, and households' real income and spending are still increasing while they are falling in Spain, Italy and Portugal. The French fear a reduction in of social welfare, even though the welfare system has actually become more generous at a time when it has declined in Germany.

State of progress in France’s adjustment

In terms of the adjustment process, let us look at French public finances, competitiveness and foreign trade, and the financial position of French businesses and their product sophistication.

1. Public finances

In 2012, only Spain will still have a fiscal deficit higher than that of France. Meanwhile, the debt ratio will continue to increase in France at a time when it is falling in Germany and has stabilised in Italy.

2. Competitiveness, foreign trade

France and Italy have a higher unit wage cost than Germany, which explains the continuing losses of export market shares for these two countries; whereas Spanish and Portuguese exports, where producer costs are low, are now growing rapidly.

Indeed, France has a large trade balance deficit in manufactured goods yet Spain and Portugal now have an even trade balance. Meanwhile, Italy and Germany have trade balance surpluses. As long as international capital mobility remains low in the euro zone, due to the “renationalisation” of investors' portfolios caused by the crisis; countries will be subject to an external balance constraint. Indeed, France is the only country that has not yet reduced its current-account deficit.

An improvement in foreign trade can be achieved either through an improvement in cost-competitiveness, hence a fall in wage costs, or through a contraction of domestic demand, which reduces imports. At present, the unit wage cost is increasing faster in France than in Germany and all the other struggling euro-zone countries causing domestic demand to continue to increase instead of fall as in Spain, Italy and Portugal.

3. Financial position of businesses and product sophistication

In contrast to other euro-zone countries, the financial position of French businesses continues to deteriorate. It is clear that the deterioration of corporate profitability is due to the low level of product sophistication in French industrial output, which means that French businesses find it harder to pass on rises in production costs to consumers, contrary to what can be seen in Germany, Spain and even Portugal. This is extended by France’s slow productivity gains (efficiency in producing products), which are recovering in Spain and Portugal.

All in all, practically everything remains to be done in France:

France still needs to reduce its fiscal deficit, improve competitiveness/ foreign trade, and restore profitability (productivity) and product sophistication.

Meanwhile, these adjustments have been completed in Germany and are progressing well in the other euro-zone countries. Italy and Portugal now have small fiscal deficits; Spain and Portugal have seen improvement in cost-competitiveness; external deficits have been reduced in Italy, Spain and Portugal while both corporate profitability and productivity have also improved; and Spanish and Portuguese products have become more sophisticated as shown from their ability to pass on higher production costs to consumers.

This all points to a risk of more restrictive fiscal policies in France, a fall in wages, and efforts to restore productivity by businesses (as in Spain and Portugal), which will inevitably be costly in terms of employment.

Patrick Artus

A graduate of Ecole Polytechnique, of Ecole Nationale de la Statistique et de l'Adminstration Economique and of Institut d'Etudes Politiques de Paris, Patrick Artus is today the Chief Economist at Natixis. He began his career in 1975 where his work included economic forecasting and modelisation. He then worked at the Economics Department of the OECD (1980), before becoming Head of Research at the ENSAE. Thereafter, Patrick taught seminars on research at Paris Dauphine (1982) and was Professor at a number of Universities (including Dauphine, ENSAE, Centre des Hautes Etudes de l'Armement, Ecole Nationale des Ponts et Chaussées and HEC Lausanne).

Patrick is now Professor of Economics at University Paris I Panthéon-Sorbonne. He combines these responsibilities with his research work at Natixis. Patrick was awarded "Best Economist of the year 1996" by the "Nouvel Economiste", and today is a member of the council of economic advisors to the French Prime Minister. He is also a board member at Total and Ipsos.

Website: cib.natixis.com/research/economic.aspx

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