From one ragged country to another. We are on a tour of Europe’s unravelling economies. Ireland, Spain and now France.
Spain was in the news again yesterday. Its borrowing rate rose to 7.5%, a level that everyone says is 'unsustainable'. We haven’t done the maths ourselves, but we will take their word for it.
Policy makers in Madrid were rattled. Naturally, they took no responsibility for the mess. Instead, they blamed short sellers! Yes, and banned short selling for three months.
That ought to do it, right? Everybody knows markets go down because people sell. So make selling illegal. Problem solved!
Now our travels have brought us back to France. At the heart of Europe and at the heart of the alliance with Germany and the whole European Union project. If France can’t keep itself together, the whole EU is doomed.
And yet, France seems to be hanging by a thread too, while François Hollande reaches for a pair of scissors!
The debt levels which the country has are as unsustainable as Britain’s, yet its policies are more irresponsible and its remedies more restricted. Although it is considered a core country in the eurozone, France’s economic profile now bears more resemblance to Greece’s the Germany’s.
Public debt in France is at 86.1pc of GDP (146pc if ECB liabilities and bank guarantees are included). The projected budget deficit this year is 4.5pc, with France having exempted itself from the EU’s instruction to bring deficits down to 3pct by the end of the year.
These numbers are not unusual in the context of eurozone economies in general. What distinguishes France is the lack of political will to address them and, as a consequence, a projected debt to GDP ratio which would place it firmly amongst the PIIGS grouping...
France’s numbers are not so different from those of the US. But America has a very big bazooka, one that France does not have... at least not yet. The US can give out the word to its central banks to buy its own bonds. It can ‘monetise the debt’ in other words.
This is always a disastrous policy but that doesn’t make it unpopular. And in a period of debt destruction, the disaster may be far in the future and it may not be suffered by the people who cause it.
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But France doesn’t have that option. It has to operate in a more honest system like the individual US states. Which means it has to cut spending.
But Mr François Hollande doesn’t seem particularly interested in addressing the situation in a reasonable way. The Telegraph describes his efforts so far:
• Lowering the pension age from 62 to 60.
• Increasing the minimum wage above inflation (albeit not much above inflation).
• Demanding that the EU take even more money from the national governments than was planned, violating a prior agreement and potentially adding £3bn to Britain’s annual tribute.
• Introducing a top rate of income tax at 75pc for those earning €1m or more – a move which gives a marginal rate of tax of 90.5pct on certain types of income.
• Introducing a tax on anyone owning assets in France but living abroad which will see 15.5pc of the rent or capital gain on property transferred to the state.
• Introducing a one off wealth tax at double the rate which had been previously trailed.
Yesterday, a lunch companion explained how the French are reacting: "France is finished. We’re leaving! Well, of course, I’m exaggerating. Young people with talent, brains and ambition are leaving. And old people with money are leaving. That leaves the middle classes... and what you call the ‘zombies’. And there are more and more of them.
"France is becoming a divided place. But it’s not divided between those with money and those without... it’s divided between those who work and those who don’t. Those who do honest work have to work harder and harder to support those who don’t work.”
Meanwhile, from back in the USA, the Dow fell another 100 points yesterday. Why? Word got out that corporate earnings projections show the slowest growth in four years. This was reported as more evidence of approaching recession...
...and more evidence that the Fed needs to take action.
“Touch us. Heal us. Give us more QE,” said the multitudes. And the economists.
It is probably just a matter of time until the big bazooka fires off another blast...
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