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By GÉRALDINE AMIEL And DAVID PEARSON

PARIS—As presidential rivals debated the roots of unemployment during the recent campaign, many companies held off on announcing job cuts to avoid inflaming an already fraught political issue.

But now that voters have chosen Socialist François Hollande over center-right President Nicolas Sarkozy to be their next president starting on Tuesday, labor unions say many large French companies are preparing to announce large layoffs in the weeks and months ahead.

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Thousands of demonstrators marched in traditional May Day celebrations in Paris. France is grappling with a jobless rate that is at a 13-year high.

Such fears are on full display at a car-assembly plant in Aulnay-sous-Bois, north of Paris, where unions are worried that PSA Peugeot-Citroën

will shut down the facility and make its 3,300 workers redundant.

“The plant must continue to produce cars,” said Jean-Pierre Mercier, an Aulnay worker representative affiliated with CGT, France’s largest union, during a recent protest. “We want to continue to work and continue to get paid.”

The carmaker recently said that amid slowing sales it could halt production at Aulnay beyond 2014.

Any spate of layoffs would aggravate the state of the French economy, Europe’s second largest, and pose an additional challenge to Mr. Hollande, who has made reversing the country’s rising unemployment a top priority. The jobless rate has climbed to a 13-year high of 10% and the Bank of France predicted Thursday that the French economy would stall in the year’s first half, after expanding 1.7% last year.

A wave of job-cut plans could also spark labor tensions and complicate Mr. Hollande’s pledge to foster a constructive dialogue between union and business leaders, as Germany has done more successfully.

France’s high and rising jobless rates highlight the diverging paths of the French economy with that of its stronger German neighbor, where unemployment has fallen to 6.6%, helped by more flexible, government-sponsored labor arrangements between government and labor.

In France, where a powerful centralized government can influence corporate strategy, business leaders were loathe to announce job cuts during the campaign.

During the runup to the campaign, Mr. Sarkozy pledged to remain vigilant over job losses, and summoned the heads of companies that were considering layoffs. In one case, after PSA Peugeot-Citroën announced 1,900 job cuts in France, Mr. Sarkozy summoned its CEO, Philippe Varin, to the Élysée Palace for discussions.

Amid campaign rhetoric, companies kept a low profile. Far-left candidate Jean-Luc Mélonchon, for example, proposed barring job cuts by companies that were profitable.

Some French companies, such as banks Société Générale SA

and BNP Paribas SA,

have already announced layoffs in recent months, citing an adverse economic environment in Europe and costly regulations born out of the euro sovereign debt crisis.

But labor unions are worried that more companies, which have said they were losing money, such as airline Air France-KLM SA,

or losing market share, such as retailer Carrefour SA,

will have to cut jobs.

“A fair number of job-cut plans have been put on hold because of the election and will now be announced,” said French economist Nicolas Bouzou from Paris-based think-tank Asteres. “Although some companies will probably wait until after the June legislative elections.”

Confronted by competition from low-cost airlines and rising fuel costs, Air France-KLM recently said it was preparing wide-ranging cost cuts. So far, management has avoided saying it would lay of workers, but labor unions expect staff cuts in the second half of the year after France’s legislative elections.

“It is quite likely that Air France will announce several hundreds of job cuts in late June,” said a person familiar with the matter.

At Carrefour, the country’s largest retailer, unions are already predicting job cuts of nearly 5% of the company’s French workforce of 110,000 as the group struggles in the face of moribund consumer spending and tough competition.

“Like a lot of companies, [Carrefour] didn’t want to make waves before the election,” said union representative Dejan Terglav. A Carrefour spokesman declined to comment.

One of the most sensitive labor flashpoints could be PSA’s Aulnay facility. The carmaker is struggling to improve the profitability of its European automotive operations that is being eroded by chronic overcapacity in the industry. The company has said that its European assembly plants are operating at just 80% of capacity, meaning it has a competitive disadvantage compared to European market leader Volkwagen AG

whose plants are operating more efficiently.

PSA has said that halting production at Aulnay beyond 2014 is just one of the options being explored and its labor unions held noisy demonstrations in the run-up to the presidential election campaign.

Employees at the plant want assurances that the factory, which makes the Citroen C3 compact car, will continue operating through 2016, when the C3 would normally be replaced by another model. But the company hasn’t provided such guarantee.

One person whose job is surely on the line is Henri Proglio, the chairman and chief executive of state-controlled power giant Electricité de France, since he clashed with Mr. Hollande during the presidential campaign.The chief, whose company relies on nuclear power to produce the bulk of its electricity, openly criticized Mr. Hollande at the start of the year, when the Socialist said he wanted to reduce France’s reliance on the atom.

At the time, Mr. Hollande’s spokesman Bernard Cazeneuve said: “The chairmen of state companies have a duty to implement government policies. If they do, fine; if they don’t, the government has to make decisions.”

An EDF spokeswoman declined to comment.

—Nadya Masidlover contributed to this article.

Write to Géraldine Amiel at geraldine.amiel@dowjones.com and David Pearson at david.pearson@dowjones.com

A version of this article appeared May 11, 2012, on page A9 in some U.S. editions of The Wall Street Journal, with the headline: With French Election Over, Unions Fear Layoffs.

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By MAARTEN VAN TARTWIJK

ROTTERDAM—The head of the European Investment Bank would welcome a capital boost from its owners, the European Union’s 27 member states, but warned that his institution shouldn’t be put under political pressure to stimulate Europe’s flagging economy.

The comments, from EIB President Werner Hoyer, come as a growing number of EU leaders are looking to the EIB to play a key role in a new growth strategy to complement austerity. The European Commission has proposed boosting the bank’s lending capacity and more details are likely to emerge at a summit of EU leaders set for May 23.

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European Investment Bank President Werner Hoyer.

In an interview, Mr Hoyer said he would welcome a capital boost and that the bank’s resources are available to stimulate the economy, but he said the EIB can only be complementary to reforms carried out by governments and he called on politicians not to overestimate the bank’s potential.

“I have the feeling that expectations vis-a-vis the EIB have to be brought under control again,” he said. “I think we can be a part of the solution to the very, very serious problems in Europe. But we can not be the solution.”

The Luxembourg-based bank was created to provide loans to small businesses across the region and to help finance large investments in infrastructure, communications and energy. The EIB, which is also active outside the EU, is a non-profit organization and mainly focuses on long-term lending. Since its establishment in 1959, it has provided more than €830 billion ($1.07 billion) in loans to what are now the EU member states.

Mr. Hoyer, a former German deputy foreign minister who took the helm at the EIB in January, said his bank should stick to its traditional goals and not be used as a rescue vehicle for ailing banks or weak euro-zone countries such as Spain or Greece.

“Recapitalizing banks is not our business and it would be a dilution and destruction of our business model,” he said. “I insist on the necessity to be present and active in all 27 member states. We need the trust of the markets and rating agencies. And therefore we need a very good loan book, not one driven by political considerations but by sound economics.”

The EIB raises money directly from capital markets and maintaining its triple-A credit rating is crucial to limit borrowing costs and maintain the ability to supply cheap loans, he said.

Mr. Hoyer said he sees the EIB’s role mainly in helping out smaller businesses across Europe, which are struggling to secure loans from banks and lack the scale to raise money in capital markets.

“The growth machine for Europe is not big public investments, it’s small and medium-size enterprises. Last year, we cooperated with 120,000 SMEs all around Europe. And I think we should stick to this recipe,” he said.

European officials have said that a capital boost of €10 billion for the EIB could generate €60 billion in additional EIB lending over the next three years. They say this in turn could generate as much as €180 billion in additional regional investments.

Mr. Hoyer said he was “a little bit struck” by this calculation, which depends on “very specific assumptions.”

The EIB said in February it would scale down lending this year as its sovereign owners have come under severe pressure, raising concerns about the bank’s reputation in financial markets. For 2012, the EIB now plans to lend €50 billion, a drop of 18% from last year’s level.

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BY COSTAS PARIS AND ALKMAN GRANITSAS

ATHENS—Greece’s finance ministry has proposed that the country pay out bondholders who refused to participate in the country’s recent debt restructuring, two senior government officials said Friday, as Athens faces a May 15 deadline to redeem a €450 million ($582.1 million) bond that wasn’t included in the deal.

According to sources, the proposal …

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By JONATHAN HOUSE and CHRISTOPHER BJORK in Madrid and SARA SCHAEFER MUÑOZ in London

MADRID—The Spanish government will force local banks to set aside an additional €30 billion ($38.81 billion) to cover potential losses and to speed up the sale of troubled assets, as investors become increasingly concerned that Spain will need a bailout targeted at the banks to help clean up its ailing financial system.

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Spain’s bank woes are being compared with those in Ireland. Above, Spanish Finance Minister Luis de Guindos.

The measures mark Spain’s fourth attempt in three years to overhaul a banking industry struggling under the collapse of a decadelong housing boom and come only days after the government rescued the country’s fourth-largest bank by market value. Concerns about Spanish banks is a major reason why the government’s borrowing costs have spiraled to worrisome levels.

But some analysts said the banks’ problems go far deeper, and will continue to worsen as home prices fall further in a country of 25% unemployment and other types of loans also increasingly sour.

Under the plan announced Friday, the government will require banks to protect themselves against potential losses against the value of an additional €123 billion worth of loans to real-estate developers not currently considered to be at risk of default. That comes just three months after the government of Prime Minister Mariano Rajoy required them to set aside €54 billion to protect against losses on past-due loans to developers.

Should the banks be unable to finance the new provisions on their own, they can turn to the state-backed Fund for Orderly Bank Restructuring, or FROB, which would also require banks to restructure by selling noncore assets and shrinking their balance sheets. Finance Minister Luis de Guindos estimated the FROB will need to provide less than €15 billion.

In addition, the government will commission an outside audit on the health of its banks to determine if they need a further cleanup. Previously, banks had to submit to “stress tests” run by the European Banking Authority and the International Monetary Fund, and some were forced to raise funds.

IMF chief Christine Lagarde praised Spain’s latest moves, saying they “will help bolster confidence and support the economy’s return to growth.”

But Spain’s festering bank problems are again drawing comparisons with Ireland, whose banking crisis ultimately drove the country into a €67.5 billion international bailout.

Both countries had massive property booms and banking systems saddled with bad loans when those bubbles burst. Like Spain, Ireland initially took a piecemeal approach to solving its banking crisis, pouring money on its banking system at points in 2009 and 2010, only to keep learning that the problems weren’t solved. In late 2010, Ireland turned to the IMF and European Union for help.

Spain has taken an even more drawn-out approach, offering institutions incentives to merge and injecting convertible debt into banks through successive cleanup plans while telling them to gradually cover losses by adding provisions.

The Irish banking crisis has been seen as cautionary tale in Spain, with politicians wanting to avoid a mammoth hit to the public budget from widespread buying of bad assets or capital injections. Instead, Spain encouraged the sector to attract private investors and consolidate, banking on an economic recovery that would allow the banks to slowly recover.

But with housing prices still in free fall and the economy heading into a deep downturn, many analysts say Spain needs to bite the bullet and inject a large amount of public funds to clean up and recapitalize its banks.

The European Commission, the executive arm of the European Union, on Friday forecast Spain’s economy will contract by 1.8% in 2012 and 0.3% in 2013, rather than contract 1% this year and expand 1.4% next year. It also forecast Spain’s budget deficit this year will equal 6.4% of gross domestic product, far above the target of 5.3% of GDP that the country had told the Commission it would achieve.

Analysts at Espírito Santo Investment Bank in London estimate the Spanish banking system needs approximately €100 billion. That is an amount that Spain would have severe difficulties raising without external support, a possibility that Spanish officials again ruled out Friday.

“It’s a very Irish-like situation with the problem of bank debt becoming public debt,” said Espírito Santo analyst Shailesh Raikundlia.

The new measures come just a few days after the government took a 45% stake in Bankia

SA. The lender’s shares fell another 1.6% on Friday, bringing losses since its July initial public offering to 45%. The yield on Spain’s 10-year bond rose above 6%, which some say is unsustainable. The government is to sell more debt next week.

Among other Spanish banks, BBVA

lost 1.3%, while Banco Santander

declined 1% in a day that saw the benchmark IBEX 35 index fall 0.7% to 6995.60. The market hit an 8½-year low earlier this week.

Spain’s outlook also will be a topic at a meeting of EU finance ministers on Monday.

Write to Jonathan House at jonathan.house@dowjones.com and Christopher Bjork at christopher.bjork@dowjones.com

Article source: http://online.wsj.com/article/SB10001424052702304203604577397951697148154.html?mod=rss_economy

By MUKESH JAGOTA And ANANT VIJAY KALA

NEW DELHI—India’s industrial output unexpectedly slumped in March as high interest rates stifled expansion, deepening worries of an economic slowdown that would pressure the central bank to ease monetary policy further despite inflation risks.

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A worker assembling part of a BharatBenz truck at Daimler’s factory in Oragadam, Tamil Nadu, April 18.

The data are the latest among a string of indicators over the past few months pointing toward a worsening state of an economy saddled with a slew of fiscal problems, the government’s failure to push through any major reforms. The situation has eroded investor confidence in Asia’s third-largest economy and slowed economic growth to its weakest pace since the 2008 global crisis. Investors also are concerned over some controversial tax proposals that would allow authorities to collect on large deals, leading some to review their presence in the country.

Some economists believe conditions could improve, as March’s industrial output figure was partly skewed because of last year’s high base. Excessive volatility traditionally seen in the data also has cast doubts on its reliability.

Data showed industrial output shrank 3.5% in March from a year earlier, compared with February’s 4.1% expansion. The reading fell far short of the median 1.5% increase estimated in a poll of 14 economists.

The last time India’s industrial output contracted was October, when production fell 5%.

Bond prices rose on the data, on hopes of more rate cuts to support the flagging economy. The benchmark 8.79% 2021 bond jumped to an intraday high of 101.72 rupees.

Local shares extended losses and the rupee weakened on worries foreign investment could slow on the worsening economic prospects. The Bombay Stock Exchange’s Sensitive Index lost 0.8% to 16292.98, its lowest finish since Jan. 16. The U.S. dollar rose to 53.66 rupees from 53.55 rupees.

March’s dismal factory output could increase pressure on the central bank to lower interest rates, especially in the absence of any fiscal steps to revive growth.

The Reserve Bank of India slashed its lending rate by 0.5 percentage point on April 17, its first cut in three years. But the bank cautioned it had limited room to lower rates much further because high crude oil prices could revive inflationary pressures.

RBI Deputy Gov. Subir Gokarn said Friday that interest rates are headed down, but the pace of cuts would depend on the evolving inflation-growth trade off.

He added that the central bank would move to halt any sharp depreciation of the rupee, highlighting a shift toward a more hands-on approach to the currency. “To the extent that we have the power, we have the capacity, we have the instruments, and [if] the rupee is behaving in a way that suggests instability and risks of spiral, we will use those instruments,” he said.

Finance Minister Pranab Mukherjee said interest rates would take time to come down, but the government was planning steps to revive industrial growth. He didn’t elaborate.

The government’s ballooning fiscal deficit has fueled inflation, forcing the RBI to ratchet up interest rates over the past couple of years. The tightening crimped consumption and made credit costlier, leading to a sharp slowdown in the economy, which is projected to have grown 6.9% in the fiscal year ended March 31, well below the 9% growth the government said it hopes to achieve in the next few years.

“It is high time that the government fast-tracks the implementation of major projects, which will increase the overall confidence and also stimulate growth in the industrial sector,” said R.V. Kanoria, president of the Federation of Indian Chambers of Commerce and Industry.

Saugata Bhattacharya, chief economist at Axis Bank, said measures to remove infrastructure bottlenecks ,along with investor-friendly policies, were necessary to revive growth.

Write to Mukesh Jagota at mukesh.jagota@dowjones.com and Anant Vijay Kala at anant.kala@dowjones.com

A version of this article appeared May 12, 2012, on page A8 in some U.S. editions of The Wall Street Journal, with the headline: India’s Industrial Output Takes a Steep Fall.

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By MATTHEW DALTON

BRUSSELS—The European Union sharply downgraded its forecasts for employment across the euro zone and predicted that the 17-nation bloc’s economy will contract this year, further underscoring the difficult road troubled member countries will face keeping their reform plans on track and their budget deficits in check.

The forecasts, published Friday by the European Commission, the EU’s executive arm, see unemployment in the euro zone averaging 11% this year, up from 10.2% in 2011. Only six months ago, the commission predicted unemployment would fall slightly this year to 10.1%. The changes are particularly stark in countries expected to undertake the toughest austerity programs: Spain, Greece, Portugal and the Netherlands.

The new forecasts are a sign of how sharply the euro zone’s prospects have deteriorated, even after a few months of relative calm brought about by two massive liquidity injections from the European Central Bank. Government-spending cuts and tax increases have hit euro-zone economies more than expected; large household debts in some countries are damping consumer spending, and the sovereign-debt crisis has shaken business confidence.

The commission’s forecast predicts a moderate recovery for the euro zone next year of 1% economic growth, after the expected 0.3% contraction this year. Greece is seen as the worst performer this year, with a forecast contraction of 4.7%, and Spain next year with a 0.3% contraction.

Some analysts say even the prediction of a tepid recovery isn’t realistic. “These forecasts, unless there is a significant change in strategy, will prove too optimistic,” said Sony Kapoor, managing director of the financial policy think tank Re-Define. “The models used are not equipped for the current situation, with a fragile banking sector, with credit channels blocked and with confidence very low.”

The euro zone’s near-term performance will almost certainly be worse than in these forecasts. That is because several countries—France, Spain and the Netherlands, among others—will need to undertake new austerity measures to bring their budget deficits in line with EU rules. The forecasts don’t account for these new measures, which will weigh on growth in the near term.

The commission’s forecasts have become particularly important under new rules that require EU governments to review each other’s national budget plans before they are debated by national parliaments. The forecasts provide the economic baseline used in the reviews, an attempt to prevent governments from avoiding tough cuts by making optimistic assumptions about growth and other economic variables.

The sharpest upward revisions in unemployment were for Spain, forecast at 24.4% this year, up from 20.9% in the commission’s November forecast. The Dutch unemployment rate, long one of the lowest in Europe, is seen at 5.7% this year, up from 4.7% in the November forecast. That could be a tougher problem for the Netherlands than other countries: Economists say an economy with heavily indebted households like the Netherlands is particularly sensitive to a rise in the unemployment rate.

In Portugal, the unemployment rate is seen at 15.5% this year, up from 13.6% in the previous forecast. That could derail the country’s closely watched bailout program.

The Italian unemployment rate this year is now projected to be 9.5%, up from 8.2% in the November forecast. European officials are nervously watching the political situation in Italy, where the technocratic government of Prime Minister Mario Monti is losing popular support for austerity policies and reforms needed to bring the country’s deficit in line with EU rules.

Corrections Amplifications

Greece’s GDP is set to shrink 4.7% this year and there will be no growth in 2013. An earlier version of this article incorrectly said GDP was set to shrink 4.7% this year and in 2013.

Write to Matthew Dalton at matthew.dalton@wsj.com

A version of this article appeared May 12, 2012, on page A10 in some U.S. editions of The Wall Street Journal, with the headline: Euro-Zone Growth, Jobless Forecasts Worsen.

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BY JOSH MITCHELL

U.S. wholesale prices declined for the first time this year, suggesting a drop in energy costs is helping to keep inflation under control.

The index of producer prices, which measures how much wholesalers and manufacturers pay for goods and materials, fell a seasonally adjusted 0.2% in April from a month earlier, the Labor Department said Friday.

The decline, the first since December, was due entirely to cheaper prices for energy goods, including gasoline and utility gas.

Prices on other goods rose, though at …

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By BOB DAVIS And TOM ORLIK

BEIJING—China’s economy slowed sharply in April—from industrial output to bank lending to foreign trade—throwing cold water on expectations for a rapid recovery in the world’s main growth engine, and putting pressure on Beijing to shift policy decisively into stimulus mode.

The poor results likely came as a surprise to China’s top policy makers. At the end of April, Chinese Premier Wen Jiabao predicted—incorrectly—that trade figures would show both healthy domestic demand as well as recovering appetite for Chinese exports. The slowing economy adds another layer of uncertainty as China deals with the political fallout from the ousting of former political highflier Bo Xilai, and prepares for its once-in-a-decade change in leadership.

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A flour vendor naps as he waits for his customers in front of his stall at a wholesale market in Beijing on Friday.

“Political transition delays policy response; that’s probably why we haven’t seen much loosening” of fiscal and monetary policy thus far, said Zhang Zhiwei, a China analyst at Nomura research. “The economy has now slowed down so much that there will be a consensus to promote growth.”

China’s economy grew at 8.1% in the first quarter, compared to the year-earlier period, its slowest pace of growth since the spring of 2009, and analysts had widely expected a rebound in the current quarter. But that now looks unlikely and several analysts downgraded their forecasts. “We were wrong,” said Lu Ting, Bank of America’s China economist, who cut his second quarter forecast on Friday to 7.6%, year-over-year, from 8.5%

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Slowing inflation, with the consumer-price index dipping to 3.4% year-to-year in April from 3.6% in March, was one of the bright spots in the data. With inflation moderating, Chinese leaders can worry less that stimulus spending will lead to a new burst of price rises, which they spent much of last year battling.

But for the global economy, the prospect that a rebound in the world’s second-largest economy will take longer than thought is bad news. With Europe in recession, the U.S. and Japan struggling to maintain 2% growth and India’s economy weakening, the hopes for China to jumpstart demand had been amplified. A weaker China means fewer imports of raw materials from Latin America, Australia, Indonesia and Africa, agricultural goods from the U.S., and capital goods from Europe, among other products. China’s imports from the U.S. have grown just 2.5% so far this year

The data, which missed expectations by a considerable margin, took the markets by surprise. The Hang Seng Index closed down 1.3% and the Shanghai Composite Index down 0.6%.

Growth in industrial production dipped to 9.3% in April from 11.9% in March, the lowest level since May 2009. That fall in output reflected broad based weakness across investment, consumption, and exports—the three main drivers of China’s growth.

Growth in electricity output, often seen as a proxy for the health of China’s industrial sector, fell to 0.7% year-to-year, down from 7.2% in March.

The government’s two-year effort to deflate the housing bubble also put the brakes on economic activity. Housing sales, by area, fell 14.9% in the first four months of the year. Weak demand dented incentives for developers to invest in new projects. The area of new residential property under construction shrank 7.9% in the year to April from the same period in 2011.

Foreign demand was also weak, with China reporting on Thursday that growth in exports dipped to 4.9% year-to-year in April from 8.9% in March. Exports to the troubled European economy, which fell 2.4% year-to-year, were a weak a particular weak spot.

“Companies in Europe are running out of cash,” said Willy Lin, managing director at Milo’s Knitwear International Ltd., a Hong Kong company that manufactures and exports from China. “All the brands owe money to Hong Kong or Chinese businesses.” Adding to the problem, he says: Too many Chinese exporters focus on labor-intensive products and are losing business to lower-cost nations like Vietnam and Cambodia.

There were signs of worse to come on the trade front. Imports of components for products to be sold to foreign customers fell 4.1% year-to-year. Analysts said that was a sign of destocking by firms worried about weak external demand.

With the data markedly weaker than expected, Chinese policy makers are likely to accelerate efforts to ease policy.

In contrast to the U.S. and many European governments, China’s public finances are strong, creating space for a fiscal stimulus. The Ministry of Finance has remained conservative so far this year, with a fiscal surplus of 874 billion yuan ($138 billion) in the first four months. Ratcheting up public spending on infrastructure and public housing in the months ahead is one option to support growth, though it would take time for the projects to get under way and affect the economy much.

When China boosted infrastructure spending in 2009 and 2010, in response to the global financial crisis, it did so largely through increased lending, which supported growth but also increased real-estate prices and raised fears of a spate of bad loans. The government is wary of undertaking a similar crash-lending program

China’s central bank has been working behind the scenes to make it easier for banks to lend, but so far that appears to be having little impact. New loans fell to 681 billion yuan in April, down from 1,010 billion yuan in March and their lowest level so far this year.

He Weisheng, a China strategist at Citibank, said that reflected weak demand for loans rather than insufficient capital at banks. “The banks have the money to lend, the problem is that firms don’t see profitable opportunities to invest, so they don’t want to borrow” he said.

That raises the question of whether central bank’s preferred method of boosting the economy—reducing the reserves that banks have to hold—would have much effect. “The chances of a cut in the reserve-requirement ratio are now above 50%, but with liquidity ample that would be mainly a symbolic show of support for growth by the central bank” said Mr. He.

Easing controls on the property sector is also a possibility—and there are signs that sales have been allowed to edge up in some cities after the Lunar New Year holiday—but that would risk reinflating the property bubble and would require Chinese leaders to reverse policies they have stressed for months—a change that would compund uncertainty in an already tumultuous year for China.

—Esther Fung and Stefanie Qi contributed to this article.

Write to Bob Davis at bob.davis@wsj.com and Tom Orlik at Thomas.orlik@wsj.com

A version of this article appeared May 12, 2012, on page A8 in some U.S. editions of The Wall Street Journal, with the headline: China Gets Surprise Slowdown.

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By GÉRALDINE AMIEL And DAVID PEARSON

PARIS—As presidential rivals debated the roots of unemployment during the recent campaign, many companies held off on announcing job cuts to avoid inflaming an already fraught political issue.

But now that voters have chosen Socialist François Hollande over center-right President Nicolas Sarkozy to be their next president starting on Tuesday, labor unions say many large French companies are preparing to announce large layoffs in the weeks and months ahead.

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Thousands of demonstrators marched in traditional May Day celebrations in Paris. France is grappling with a jobless rate that is at a 13-year high.

Such fears are on full display at a car-assembly plant in Aulnay-sous-Bois, north of Paris, where unions are worried that PSA Peugeot-Citroën

will shut down the facility and make its 3,300 workers redundant.

“The plant must continue to produce cars,” said Jean-Pierre Mercier, an Aulnay worker representative affiliated with CGT, France’s largest union, during a recent protest. “We want to continue to work and continue to get paid.”

The carmaker recently said that amid slowing sales it could halt production at Aulnay beyond 2014.

Any spate of layoffs would aggravate the state of the French economy, Europe’s second largest, and pose an additional challenge to Mr. Hollande, who has made reversing the country’s rising unemployment a top priority. The jobless rate has climbed to a 13-year high of 10% and the Bank of France predicted Thursday that the French economy would stall in the year’s first half, after expanding 1.7% last year.

A wave of job-cut plans could also spark labor tensions and complicate Mr. Hollande’s pledge to foster a constructive dialogue between union and business leaders, as Germany has done more successfully.

France’s high and rising jobless rates highlight the diverging paths of the French economy with that of its stronger German neighbor, where unemployment has fallen to 6.6%, helped by more flexible, government-sponsored labor arrangements between government and labor.

In France, where a powerful centralized government can influence corporate strategy, business leaders were loathe to announce job cuts during the campaign.

During the runup to the campaign, Mr. Sarkozy pledged to remain vigilant over job losses, and summoned the heads of companies that were considering layoffs. In one case, after PSA Peugeot-Citroën announced 1,900 job cuts in France, Mr. Sarkozy summoned its CEO, Philippe Varin, to the Élysée Palace for discussions.

Amid campaign rhetoric, companies kept a low profile. Far-left candidate Jean-Luc Mélonchon, for example, proposed barring job cuts by companies that were profitable.

Some French companies, such as banks Société Générale SA

and BNP Paribas SA,

have already announced layoffs in recent months, citing an adverse economic environment in Europe and costly regulations born out of the euro sovereign debt crisis.

But labor unions are worried that more companies, which have said they were losing money, such as airline Air France-KLM SA,

or losing market share, such as retailer Carrefour SA,

will have to cut jobs.

“A fair number of job-cut plans have been put on hold because of the election and will now be announced,” said French economist Nicolas Bouzou from Paris-based think-tank Asteres. “Although some companies will probably wait until after the June legislative elections.”

Confronted by competition from low-cost airlines and rising fuel costs, Air France-KLM recently said it was preparing wide-ranging cost cuts. So far, management has avoided saying it would lay of workers, but labor unions expect staff cuts in the second half of the year after France’s legislative elections.

“It is quite likely that Air France will announce several hundreds of job cuts in late June,” said a person familiar with the matter.

At Carrefour, the country’s largest retailer, unions are already predicting job cuts of nearly 5% of the company’s French workforce of 110,000 as the group struggles in the face of moribund consumer spending and tough competition.

“Like a lot of companies, [Carrefour] didn’t want to make waves before the election,” said union representative Dejan Terglav. A Carrefour spokesman declined to comment.

One of the most sensitive labor flashpoints could be PSA’s Aulnay facility. The carmaker is struggling to improve the profitability of its European automotive operations that is being eroded by chronic overcapacity in the industry. The company has said that its European assembly plants are operating at just 80% of capacity, meaning it has a competitive disadvantage compared to European market leader Volkwagen AG

whose plants are operating more efficiently.

PSA has said that halting production at Aulnay beyond 2014 is just one of the options being explored and its labor unions held noisy demonstrations in the run-up to the presidential election campaign.

Employees at the plant want assurances that the factory, which makes the Citroen C3 compact car, will continue operating through 2016, when the C3 would normally be replaced by another model. But the company hasn’t provided such guarantee.

One person whose job is surely on the line is Henri Proglio, the chairman and chief executive of state-controlled power giant Electricité de France, since he clashed with Mr. Hollande during the presidential campaign.The chief, whose company relies on nuclear power to produce the bulk of its electricity, openly criticized Mr. Hollande at the start of the year, when the Socialist said he wanted to reduce France’s reliance on the atom.

At the time, Mr. Hollande’s spokesman Bernard Cazeneuve said: “The chairmen of state companies have a duty to implement government policies. If they do, fine; if they don’t, the government has to make decisions.”

An EDF spokeswoman declined to comment.

—Nadya Masidlover contributed to this article.

Write to Géraldine Amiel at geraldine.amiel@dowjones.com and David Pearson at david.pearson@dowjones.com

A version of this article appeared May 11, 2012, on page A9 in some U.S. editions of The Wall Street Journal, with the headline: With French Election Over, Unions Fear Layoffs.

Article source: http://online.wsj.com/article/SB10001424052702304543904577396310354521878.html?mod=rss_economy

By VANESSA MOCK and FRANCES ROBINSON

BRUSSELS—The European Commission will issue its latest round of economic forecasts for member states Friday that are expected to show a further deterioration in the Euro-zone’s peripheral economies that is beginning to affect the core of the currency bloc.

The gloomy outlook for growth compared with the last time the Commission issued its forecasts three months ago suggests further difficulties for governments seeking to meet budget deficit targets.

“It will be interesting to get an idea of just how bad things really are in Spain, France and the Netherlands,” Carsten Brzeski, senior economist at ING in Brussels. “We’re likely to see Germany still growing, but at a slower pace, while other periphery countries drawn deeper into recession. It’s more of a race to the bottom than real divergence.”

Spain in particular will be in focus as it lags behind its prescribed European Union deficit target and battles a recession that has seen unemployment soar to 24%. The commission uses the forecasts to decide whether countries will meet the goals they have set out. However, a Spanish finance ministry official pledged this week to comply with Spain’s stability program: a deficit equal to 5.3% of GDP in 2012 and to 3% of GDP in 2013.

Although Spain has not asked for its targets to be revised and is keen not to be singled out as a laggard, Euro-zone governments signalled in the past days that the country could be given leeway if it struggles to meet targets.

“The commission has already said it will be flexible on the Spanish deficit, but now the big question is if they will do anything France’s massive budget deficit, where it has kept silent,” says Karel Lannoo, an economist at the Centre for European Policy Studies, a think tank in Brussels.

France would have to radically rein in spending to achieve its current deficit target for next year, a move that would jar with election pledges by Socialist President-elect François Hollande to spur economic growth and create more public sector jobs.

On Wednesday, there was a first sign that Germany could be readying to help re-balance the euro-zone, with the Bundesbank saying the German government could allow inflation to rise. Many have called on Germany to overcome its long-standing aversion to higher inflation in order to boost its domestic demand and increase imports for struggling euro-zone members.

Jens Ulbrich, senior economist at the German central bank, said that it would not help to weaken Germany’s highly successful export sector and loosen national financial policies just to benefit other member states, but added that Germany could boost its service sector and increase incentives for investors.

“It’s a move that it long overdue and could mean that German inflation would, for a while, be higher than the Euro-zone average,” Mr. Brzeski said. “But it’s hard to see a sustained period of higher inflation, as German exporters will say they are pricing themselves out the global export market.”

The EU’s Economics Commissioner Olli Rehn is expected to call on Greece to stick its reforms on Friday, reflecting growing European concern at the post-election political turmoil in the country. A coalition of left-wing parties that came second in Sunday’s polls has called on the ruling coalition to turn its back on its promise to slash spending in return for lifeline of €130 billion.

On Wednesday, German Foreign Minister Guido Westerwelle said future loans payments would be withheld if Athens abandoned strict fiscal austerity targets set by its EU partners and the International Monetary Fund. Finance Minister Wolfgang Schaueble said Greece had to make a choice of staying in the 17-member club and playing by the rules, or leave the Euro-zone.

“If they don’t want to stick to the rules of good governance, at some stage people will say: ‘It’s finished,’”said Karel Lanoo. “They could get out of the Euro-zone but we know the Greek population want to stay inside it because they know that if they leave, they will worse off. They will have no access to capital markets at all.”

The commission said in its last economic forecast that EU economy would stagnate, with the first signs of improvements for GDP the second half of 2012.

Write to Frances Robinson at frances.robinson@dowjones.com

Article source: http://online.wsj.com/article/SB10001424052702304543904577396242305489850.html?mod=rss_economy