The France and Italy country-specific exchange traded funds are outperforming the broader European markets, but investors may be ignoring major risks in the two economies as all eyes are on Greek drama.
Year-to-date, the iShares MSCI France ETF (NYSEArca: EWQ) rose 12.0% and the iShares MSCI Italy Capped ETF (NYSEArca: EWI) increased 17.7%. In contrast, the broader iShares MSCI EMU ETF (NYSEArca: EZU) gained 10.8% and SPDR EURO STOXX 50 (NYSEArca: FEZ) returned 9.6% so far this year.
However, investors should be more cautious with their France and Italy outlook. France and Italy face mounting pressure from high debt, slow growth, unemployment, poor public finances and lack of reforms to remedy the situation, reports Satyajit Das for the Financial Times.
Excluding unfunded pension, healthcare costs and Eurozone bailout payments, Italian total real economic debt is 259% of gross domestic product, up 55% since 2007, and France’s equivalent debt is 280% of GDP, up 66% since 2007.
Italy’s budget deficit is 2.9%, with government debt at 132% of GDP, while France’s budget deficit is 4.2%, with government debt at 95% of GDP.
The two economies would have to generate significant growth to dig themselves out from a mountain of debt. For instance, Italy’s economy is still some 7% below pre-financial crisis peaks and is hovering at the same level as it was in 1999, reports The Hill.
Unemployment remains a significant drag on the economies. Italian unemployment is over 12%, with youth unemployment as high as 44%. French unemployment is above 10%, with youth unemployment at more than 25% – unemployment in France also touched a record high of 3.55 million people in May, according to Dow Jones Business News.
Consequently, the two countries’ problems are more structural in nature, and the governments have not intervened with any type of meaningful reforms to remedy the situation. For instance, the two are struggling with high wages, inflexible labor markets, high welfare benefits, large public sectors and restrictive trade practices.
Moreover, the two countries are losing their competitive edge. For instance, in the World Economic Forum’s competitiveness rankings, France and Italy ranked 23rd and 49th, respectively, compared to Germany at fourth and Britain at 10th. Pressuring the two countries’ competitiveness, the single currency has made Italian and French goods more expensive on the global market – prior to the Eurozone, the two governments would have loosened monetary policies to depreciate their local currencies.
As a result, both countries have increased debt funding to maintain activity and living standards. However, the increased debt load is unsustainable without significant economic growth. Otherwise, the two countries would have to enact austerity measures, which would be counterproductive to economic growth, as a way to diminish their debt burdens.
For more information on the Eurozone, visit our Europe category.
Max Chen contributed to this article.