Nov 8 - After a surprise rate cut by the European Central Bank, new signs of weakness in the French economy have investors asking what the ECB has left in its armoury. David Pollard reports.
Whether or not the ECB partied after its rate cut, it certainly woke up with a headache: France. The euro zone's second- biggest economy served up a double dose of bad news. First - a downgrade from credit agency Standard & Poor's - seen as a thumbs down to President Hollande's efforts to put the economy back on track. Even if Finance Minister, Pierre Moscovici, waved aside the news with a gallic shrug. SOUNDBITE (French) Piere Moscovici, French Finance Minister, saying: "This is a country you can trust. That's something very concrete. At the same time, I'm sorry about the downgrade." Second - much worse-than-expected manufacturing data. A signal perhaps that growth - which turned positive in the second quarter - could be slipping again. Cue the ECB - and hopes of more cheap cash for euro zone banks. A Reuters poll says economists see the ECB providing a further round of refinancing operations - within six months. Though the timing is still open to question - as is whether it will rid the euro zone of the bogeyman stalking it right now: deflation. Jacques Cailloux of Nomura. SOUNDBITE (English), Jacques Cailloux, Senior European Economist, Nomura, saying: "Essentially the current policy framework in Europe, which is to try to regain competitiveness, is a very deflationary policy framework, and there is nothing the ECB can do about this. In fact, they've been supporting it for the past two years, and the result of it are now to be seen. We are entering a deflationary environment for the region as a whole." Enter Germany. Could Europe's powerhouse come to the ECB's assistance? Latest, record, figures show a massive German trade surplus. It's earning much more than its neighbours - and the ECB wants it to spend more, to boost the euro zone. But with German inflation already running higher than many Germans would like, it's a big call. William de Vijlder is from BNP Paribas. SOUNDBITE (English) William De Vijlder, BNP Paribas, saying: "They are already running at two percent, so they are already pushing it a bit far with that respect, and then to go even further and say you need to run bigger deficits to boost spending, I think that's too much asked. " There are encouraging signs - from unlikely places. Despite the wave of protests across Greece and Portugal, the southern periphery's exports are on the increase. And Spain - unlike France - recently got a sovereign debt upgrade.