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1 August 2012

Liberty, equality, bankruptcy – the future of France

Whatever happens to the Eurozone in the short-term, the long-term looks truly grim. That, at least, is the case made by Thomas Pascoe in the Telegraph. The situation faced by peripheral Eurozone members is bad enough, but the underlying untenability of the situation also applies to France: 

  • "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." 

Pascoe admits that current French debt and deficit numbers are "not unusual in the context of eurozone economies in general", but that "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".

Needless to say, one should be careful about all economic models – even those coming from an august institution like the Bank of International Settlements – but, that said, the future does not look good:

  • "Even under the most savage of these austerity models, French public debt reached 200pc of GDP within 30 years. Using the baseline scenario, debt reaches 400pc of GDP in the same time frame thanks to an aging population, relatively high structural unemployment and perpetual over-spend in government." 

Pascoe points out that the British scenarios are none too encouraging either, but there is a rather important difference between the two countries: 

  • "…the British… have two options not open to eurozone France. Firstly, they can continue to print paper to honour their debts and thus sustain otherwise impractical debt payments… 
  • "Secondly, both have the option of cancelling the bond issues purchased by their central banks using Quantitative Easing. In a stroke, this would reduce public debt back to less than 50pc of GDP. This is politically impossible for the eurozone given that costs and benefits would be felt very differently across the different sovereigns." 

So, how do the French hope to avoid bankruptcy? By electing a Socialist President, naturellement

  • "Mr Hollande’s attempts to rectify the French problem have so far involved the following… lowering the pension age… increasing the minimum wage… introducing a top rate of income tax at 75pc… introducing a tax on anyone owning assets in France but living abroad… introducing a one off wealth tax… 
  • "These reforms may have had some chance of working in the 1960s, when there were sufficient exchange rate and immigration controls in Europe to prevent the mass exodus of people and capital overseas. They have not the slightest prospect of working now." 

Of course, while Britain is thankfully not in the Eurozone, it’s economy is just as liable to capital flight as its French counterpart – something British voters may wish to consider before opting for a socialist government of their own.


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