France's debt crisis could doom the European Union
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Bill Bonner Guest blogger
From one ragged country to another. We are on a tour of Europe鈥檚 unraveling economies. Ireland鈥�Spain鈥nd now France.
Spain was in the news again yesterday. Its borrowing rate rose to 7.5%鈥 level that everyone says in 鈥渦nsustainable.鈥� We haven鈥檛 done the math 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鈥hort sellers! Yes, and banned short selling for 3 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鈥nd at the heart of the alliance with Germany and the whole European Union project, if France can鈥檛 keep itself together鈥he whole EU is doomed.
And yet, France seems to be hanging by a thread too鈥hile Francois Hollande reaches for a pair of scissors!
The Telegraph:
The debt levels which the country has are as unsustainable as Britain鈥檚, yet its policies are more irresponsible and its remedies more restricted. Although it is considered a core country in the eurozone, France鈥檚 economic profile now bears more resemblance to Greece鈥檚 [than] Germany鈥檚.
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鈥檚 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鈥�
France鈥檚 numbers are not so different from those of the US. But America has a very big bazooka鈥�.one that France does not have鈥t least not yet. The US can give out the word to its central banks to buy its own bonds. It can 鈥榤onetize the debt鈥� in other words.
This is always a disastrous policy鈥ut that doesn鈥檛 make it unpopular. And in a period of debt destruction, the disaster may be far in the future鈥nd it may not be suffered by the people who cause it. But France doesn鈥檛 have that option. It has to operate in a more honest system鈥ike the individual US states. Which means, it has to cut spending.
But Mr. Francois Hollande doesn鈥檛 seem particularly interested in addressing the situation in a reasonable way.The Telegraph聽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 拢3bn to Britain鈥檚 annual tribute.
- Introducing a top rate of income tax at 75pc for those earning 鈧�1m or more 鈥� 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:
鈥淔rance is finished. We鈥檙e leaving! Well, of course, I鈥檓 exaggerating. Young people with talent, brains and ambition are leaving. And old people with money are leaving. That leaves the middle classes鈥nd what you call the 鈥榸ombies.鈥� And there are more and more of them. France is becoming a divided place. But it鈥檚 not divided between those with money and those without鈥t鈥檚 divided between those who work and those who don鈥檛. Those who do honest work have to work harder and harder to support those who don鈥檛 work.鈥�
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 4 years鈥� This was reported as more evidence of approaching recession.
鈥nd more evidence that the Fed needs to take action.
鈥淭ouch us. Heal us. Give us more QE,鈥� said the multitudes. And the economists.
It is probably just a matter of time until the big bazooka fires off another blast鈥�
