Turning Into PIIGS: Why France’s Economic Debt Crisis Could Doom the EU

From one ragged country to another. We are on a tour of Europe’s unraveling economies. Ireland…Spain…and now the French economy.

Spain’s economy was in the news again yesterday. Its borrowing rate rose to 7.5%…a level that everyone says in “unsustainable.” We haven’t 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…short 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…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’s economy seems to be hanging by a thread too…while Francois Hollande reaches for a pair of scissors!

The Telegraph:

‘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 [than] 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 economic numbers are not so different from those of the US. But America has a very big bazooka….one that the French economy 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 ‘monetize 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. But France’s economy 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. Francois 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.’


Bill Bonner
for Markets and Money

From the Archives…

Customs, Capital Controls and Airway Robbery
21-07-2012 – Nick Hubble

China’s Coming Assault on the Western Financial System
20-07-2012 – Greg Canavan

Has Bernanke and the Fed Discovered a New Invention in Wealth Creation?
19-07-2012 – Greg Canavan

Why You Should Watch Your Blind Spot For An Oil War
18-07-2012 – Dan Denning

Flexible Investing to Become a Relaxed Investor
17-07-2012 – Murray Dawes

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

Latest posts by Bill Bonner (see all)

Leave a Reply

1 Comment on "Turning Into PIIGS: Why France’s Economic Debt Crisis Could Doom the EU"

Notify of
Sort by:   newest | oldest | most voted
Nathan Chattaway

Hi Bill,

Where are all the young French people with talent, brains and ambition and all the old French people with money going to?

I’d be very interested in a Daily Reckoning “State of the Nations” update. You published a few articles a while ago with adjusted world maps but I’m not sure you followed up on those thoughts. Just where is the best place to live if you want to be safe, work hard and provide for your family?

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au