Wednesday, April 4, 2012

Europe’s Problems Are Not Over - Greece Moves Towards Anarchy; Spain Towards Unrest; France Towards Unsustainable Economic Policy

France is Becoming the Opposite of the U. S.

Everybody breathed a sigh of relief after Greece successfully managed their default (not to be called a default) and replaced billions of bonds with bonds worth far less.  Italy has also been stabilized, thanks to a change in government (and yes almost any change would have been an improvement).  But as France heads towards its two stage Presidential election this month and next, The Economist documents how all is not right in France.

France and the U. S. Are the Extremes
Not Good for Either Country

France has not balanced its books since 1974. Public debt stands at 90% of GDP and rising. Public spending, at 56% of GDP, gobbles up a bigger chunk of output than in any other euro-zone country—more even than in Sweden. The banks are undercapitalised. Unemployment is higher than at any time since the late 1990s and has not fallen below 7% in nearly 30 years, creating chronic joblessness in the crime-ridden banlieues that ring France’s big cities.

 Exports are stagnating while they roar ahead in Germany. France now has the euro zone’s largest current-account deficit in nominal terms. Perhaps France could live on credit before the financial crisis, when borrowing was easy. Not any more. Indeed, a sluggish and unreformed France might even find itself at the centre of the next euro crisis.

In the United States the problem is that under Conservative pressure and governance,  government is abdicating its role in economic society, and the economy will ultimately be far lower than it otherwise could have been.  In France the opposite is occurring, the French people are looking for more and more “free” government goods and services in a country where the role of government is already too high.

And with a Presidential election and its excessive pandering to the voters (no the U. S. is not unique in that regard) things could get worse, not better.

If Mr Hollande wins in May (and his party wins again at legislative elections in June), he may find he has weeks, not years, before investors start to flee France’s bond market. The numbers of well-off and young French people who hop across to Britain (and its 45% top income tax) could quickly increase.

Mr. Sarkozy and Mr. Hollande
Pictures That Do Not Inspire Confidence
Even if Mr Sarkozy is re-elected, the risks will not disappear. He may not propose anything as daft as a 75% tax, but neither is he offering the radical reforms or the structural downsizing of spending that France needs. France’s picnickers are about to be swamped by harsh reality, no matter who is president.

The optimists argue that all the fear is misplaced, that after the election things will revert to a rational process.

The last time an untried Socialist candidate became president was in 1981. As a protégé of François Mitterrand, Mr Hollande will remember how things turned out for his mentor. Having nationalised swathes of industry and subjected the country to two devaluations and months of punishment by the markets, Mitterrand was forced into reverse.

Mr Hollande’s defenders say he is a pragmatist with a more moderate programme than Mitterrand’s. His pension-age rollback applies only to a small set of workers; his 75% tax rate affects a tiny minority.

But The Economist has this warning of an almost unprecedented event.

Besides, there is a more worrying possibility than insincerity. The candidates may actually mean what they say.

At least that is one problem the United States does not have with Mr. Romney.

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