French President François Hollande may have achieved a remarkable series of political victories – at home and in Europe – since his election in May, but his pre-election promises are now threatening to destroy Europe’s second-largest economy. Under Hollande, France is now headed for a 400 percent debt to GDP ratio; and even if it were somehow, incredibly, manages to reverse course and embrace the most stringent austerity, it would still hit 200 percent debt to GDP by 2040.
One can easily understand why voters vote for politicians who cut the retirement age and promise the poorer half of the population that the State will love and nurture them forever. This is the perennial appeal of socialism in our day. It brought the previous Greek government into power and it swept Francois Hollande into the Presidency in France.
What's wrong with promising the people early retirement and the good life? The answer speaks itself at a time when public sector debt right across Europe is headed for a truly unsustainable 300 percent of GDP or worse.
Once the debt markets decide that a country is heading into territory where it looks too deeply indebted to be trusted to repay its debts the interest rates demanded by the market for holding its debt climb and climb. At a certain point simply repaying the interest will consume all the GDP the country can generate, but that is a theoretical point. Why before this mark is reached, the country concerned will have been forced to default and its citizens will find themselves experiencing the 21st Century version of The Great Depression.
Where does the European average debt figure of 300 percent come from? (After all, Japan is widely acknowledged to be in the worst debt position of all the developed nations right now, with nearly 200 percent debt to GDP and Europe is currently nowhere near that kind of debt burden.) The source of that 300 percent figure is the IMF, no less.
The IMF has a series of charts, one for each member state, with three lines on the graph, showing the possible outcomes by 2040 if a) things continue as they are b) mild efforts are made to restrain public expenditure and c) draconian efforts are made to constrain public expenditure.
France, under Hollande, is headed for a 400 percent debt to GDP ratio on its present path and even if it were somehow, incredibly, to reverse course and embrace the most stringent austerity, it would still hit 200 percent debt to GDP by 2040.
France is supposed to be at the core of the eurozone, as a solid partner to Germany. However, smiles and fine words cannot paper over the enormous and growing rift between the erstwhile partners.
The problem, as John Mauldin writes in his latest newsletter, is that Francois Hollande "does not have the economic sense of a goose". What Hollande is doing to public expenditure in France is leaving the Germans absolutely aghast. Mauldin's judgement on the direction being taken by France's new President is extremely negative:
“So, what has been the response of the new French government (to France's increasing indebtedness)? It has decided to double down on what was already an irresponsible path. Do you think the average German understands just how bad off their "partner" is? For that matter, do you think the average French politician understands how bad off France is? Certainly not the majority of them, and it is doubtful that their counterparts in Germany do, either.”
“This is going to be a train wreck of truly biblical proportions. Hollande evidently has very good political instincts and knows how to work the system. Unfortunately, he has the economic understanding that God gave a goose."
Mauldin goes on to point out that far from seeking to lower the debt burden on the French state caused by excessive social benefit promises, in his first month Hollande undid one of Nicolas Sarkozy's major accomplishments.
Sarkozy had managed to raise France's ludicrously unaffordable low retirement age from 60 to 62 - nowhere near the 67-69 level it will need to be to give France a prayer of staying solvent, but at least a start.
Hollande garnered plenty of votes by promising to wind that back down to 60, and made good on his pledge. We saw where unaffordable pledges took Greece to, and here is one of the eurozone's core members steaming full speed in the same direction. Oh dear.
Next, Hollande won still more votes by a "soak the rich" policy, and made good on that too. Those with an income of over 1 million euros will now pay tax at the 75 percent level under Hollande's "contribution exceptionnelle sur la fortune". And they will pay not just on income but on net worth. Good solid socialist stuff and as daft as it comes. France's millionaires will be decamping in droves, taking their wealth with them.
Think about it. If you were on five million euros a year how much would you pay for the joy of continuing to live in Paris instead of, well, just about anywhere else?
And France now has a "Minister of Productive Recovery" whose mission looks to be to make it impossible for French employers to reduce their head counts. Nice one. We can stop thinking Spanish bail outs, that's a done deal, and start thinking French collapse, it seems...
By Anthony Harrington
Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.
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